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Summary
Based on the Fed's latest flow-of-funds data, foreigners came out of this year's first quarter holding a net of almost $400 billion in additional financial claims against the United States.
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Introduction
On June 9th, the Federal Reserved released the latest edition of its publication "Z.1," "The Flow of Funds Accounts of the United States." The most recent data are through the quarter ended 3/31/05. Before moving on to examination of how foreign investors behaved during this period, I want to freshen up some numbers from full-year 2004. They have been revised slightly in the latest report, but perhaps they go a long way towards explaining Alan Greenspan's Treasury yield and yield curve conundrum?
* During 2004, foreign investors absorbed an extraordinary 98.5% of all Treasury issuance, a net of $357.2 billion acquired, versus a net of $363.5 issued.
* Foreigners absorbed almost as large a proportion of the issuance of US agency securities, 93.7%, a net of $129.6 billion acquired, versus net issuance of $138.3 billion.
* Thus, combined foreign purchases of Treasuries and agencies equaled a stunning 97.2% of total issuance, $486.8 billion, versus $500.8 billion.
* As to the purchase of corporate bonds, foreign investors took down a net of $265.5 billion, 44.7% of total net issuance of $594.3 billion.
* In addition to the huge proportion of foreign Treasury acquisitions last year, the Federal Reserve added $51.2 billion to its own Treasury portfolio. This means that during 2004, the Fed and foreign investors absorbed $408.4 billion or about 112.7% of total issuance of $362.5 billion. Obviously, this had a highly favorable influence, on balance, on Treasury yields during 2004, although an influence hugely lacking in traditional open-market characteristics.
A Look at the Latest Numbers
* As of 3/31/05, foreign investors held a total of $9.723 trillion of US financial assets, up almost $400 billion from revised holdings of $9.326 trillion as of 12/31. From 3/31/04, the increase was approximately $1.11 trillion. (See Table 1 in the table appendix at the end of the text.)
* As of 3/31/05, foreign financial liabilities totaled $4.634 trillion, resulting in a net foreign claim against the US of $5.089 trillion. (See Table 1.)
* The dollar's exchange-rate value put in a major bottom in the spring of 1995, commencing a steep rise into early 2002. Note in Table 1 how the expansion in the growth of foreign holdings of US financial assets paralleled the dollar's rise.
* As Table 1 indicates, the United States, for the first time since World War II years, became a net debtor during 1985.
* Table 2 segregates the classes of capital-market assets that are readily salable by foreigners, or where a significant slowing in the rate of accumulation could adversely influence domestic prices. As of 3/31, these totaled $6.668 trillion, a very meaningful 68.5% of total US financial assets held by foreigners.
This illustrates the exposure US markets could have to a decline in the current rate of accumulation, no less a sizable decline in this rate, were it not matched by an equal decline in American demand for these funds (e.g., declines in the federal budget and current-account deficits). Outright net sales by foreigners would create "chaotic" conditions, to put it mildly.
* As of 3/31/05, foreign investors held the following respective percentages of total outstandings of Treasuries, agencies, US corporate bonds and US equities: 43.0%, 13.2%, 27.3% and 13.4%. Combined holdings of Treasuries and agencies were 25.8% of total outstandings.
By comparison, going back to 12/31/94, not long before the dollar put in the major bottom mentioned above, foreigners held the following respective percentages of total outstandings of Treasuries, agencies, US corporate bonds and US equities: 18.3%, 5.7%, 13.4% and 7.0%. At that time, the combined holdings of Treasuries and agencies were 13.4% of total outstandings.
The table below breaks out these percentages as of 3/31/05, as of the end of last year, as of the end of the year-earlier March quarter, as well as of 12/31/94.
Summary: Foreign Holdings to Total Outstandings
-----------------------------------------------------
03/31/05 12/31/04 03/31/04 12/31/94
--------------------------------------
Treasuries 43.0% 42.5% 40.1% 18.3%
Agencies 13.2% 12.7% 11.2% 5.7%
-----------------------------------------------------
Treas. + Agcy. 25.8% 25.0% 22.9% 13.4%
-----------------------------------------------------
Corp. Bonds 27.3% 26.6% 25.3% 13.4%
Corp. Equities 13.4% 13.0% 12.4% 7.0%
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* As of 3/31/05, the 15 largest foreign holders of US Treasury debt had total holdings of $1.667 trillion, an increase of almost $102 billion or 6.5% from 12/31. (These figures include both "official" and "private" holdings. See Table 3.)
Tables 1 through 3 in the appendix break out foreign holdings of US financial assets as of the end of given periods. These are dollar values outstanding at the end of those periods. Table 4, however, breaks out the net foreign flows into the markets during the periods shown.
* For all of 2004, foreign investors acquired a record net $1.255 trillion of US financial assets. During 2005's first quarter, this figure fell to an annual rate of $1.170 trillion, not materially below last year's record level.
* During this year's first quarter, a very high 73.6% of US financial-asset acquisition by foreign investors was in highly marketable (therefore, highly liquid or "exposed") asset classes. This was up from 66.0% for all of 2004, and equal to the same 73.6% level achieved in 2003.
* During the March quarter, foreign purchases of Treasury securities fell to 61.3% of issuance ($372.6 billion, versus $606.9 billion, at annual rates). This difference of $234.3 billion was almost entirely offset on the domestic-sector side by the $229.8 billion in total purchases by the household sector ($50.2 billion), the commercial banking sector ($50.2 billion), and state and local governments ($93.5 billion).
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Table Appendix
Table 1.
------------------------------------------
FOREIGNERS' U.S. FINANCIAL
ASSETS/LIABILITIES
(Billions of Dollars, Latest Data
Released 06/09/05 Through 03/31/05)
------------------------------------------
Total Total
Financial Financial
Assets Liabilities Difference
------------------------------------------
2005
03/31 9722.9 4634.4 5088.5
------------------------------------------
As of
12/31
-----
2004 9326.0 4263.5 5062.5
2003 8193.7 4064.5 4129.2
2002 7441.1 3981.8 3459.3
2001 6965.8 3650.1 3315.7
2000 6584.9 3490.2 3094.7
=======================================
1990 1998.4 1388.8 609.6
---------------------------------------
1985 967.4 869.7 +97.7
1984 805.3 841.6 -36.3
---------------------------------------
1980 494.2 666.4 -172.2
1970 104.8 140.5 -35.7
1960 38.9 63.5 -24.6
1950 17.4 31.4 -14.0
=======================================
1945 16.3 14.9 1.4
------------------------------------------
Source: "Flow of Funds Accounts
of the United States" (Federal
Reserve "Z.1" release).
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Table 2.
-----------------------------------------------
FOREIGN HOLDINGS OF US FINANCIAL ASSETS
AS OF 03/31/05 (Billions of Dollars
-- Latest Data Released 06/09/05)
-----------------------------------------------
% of
Total
Total US Financial Assets -----
Held by Foreign Investors 9722.9 100.0
===============================================
Credit-Market Instruments# 4729.3 48.6
------ ----
Open Market Paper 118.4
US Govt. Securities 2775.4
Treasury 1949.6
Agency 825.8
US Corporate Bonds 1835.5
-----------------------------------------------
US Corporate Equities 1938.4 19.9
------ ----
Credit-Market Instr.
+ Corp. Equities 6667.7 68.5
====== ====
-----------------------------------------------
Detail of US Government Securities
-----------------------------------------------
Treasury 1949.6
Official 1233.2
Private 716.4
Agency 825.8
Official 225.5
Private 600.3
------
2775.4
======
-----------------------------------------------
Source: "Flow of Funds Accounts of the United
States" (Federal Reserve "Z.1" release.) #For
the purpose of this analysis, the category
"Loans to US Corporate Business" has been ex-
cluded. As of 03/31/05, this category had tot-
al outstandings of $148.3 billion.
-----------------------------------------------
Table 3.
----------------------------------------
15 LARGEST FOREIGN HOLDERS OF U.S.
TREASURY DEBT AS OF 03/31/05, VS. THE
SAME COUNTRIES' HOLDINGS AS OF 12/31/04
(Amounts in Billions of $s)*
----------------------------------------
03/31 12/31
Country 2005 2004
----------------------------------------
( 1) Japan 679.5 689.4
( 2) Mainland China 223.5 222.9
( 3) Caribbean Bank-
ing Centers@ 137.2 71.4
( 4) United Kingdom 122.2 101.0
( 5) Taiwan 71.1 67.9
( 6) OPEC 62.2 62.1
( 7) Korea 57.1 55.0
( 8) Germany 56.0 50.2
( 9) Hong Kong 45.2 45.1
(10) Switzerland 44.1 42.1
(11) Luxembourg 42.2 41.6
(12) Canada 38.4 33.3
(13) Mexico 32.5 32.8
(14) Singapore 30.7 30.3
(15) France 25.1 20.0
----------------------------------------
Total 1667.0 1565.1
----------------------------------------
*Estimated end-of-period foreign
holdings of US Treasury marketable
and nonmarketable bills, bonds and
notes based on Treasury Foreign
Portfolio Investment Survey bench-
marks and on monthly data reported
under the Treasury International
Capital (TIC) reporting system.
Totals comprise both official and
private holdings. Data subject to
revision. @Includes Bahamas, Ber-
muda, Cayman Islands, Netherlands
Antilles, and Panama.
----------------------------------------
Table 4.
--------------------------------------------------------
NET ACQUISITION OF U.S. FINANCIAL ASSETS
BY FOREIGN INVESTORS -- 2000 TO 03/31/05*
(Billions of Dollar)
--------------------------------------------------------
Years Ended December 31
------------------------------ 03/31
2000 2001 2002 2003 2004 2005*
----- ----- ----- ----- ------ ------
Net Acquisition
of Finan. Assets 963.0 657.7 741.7 783.0 1255.3 1169.9
================= ===== ===== ===== ===== ====== ======
Credit-Market
Instruments
----------------
Open-Mkt. Paper 4.3 -2.6 10.3 9.9 18.1 -29.6
Treasury Sec. -70.5 10.5 138.9 285.1 357.2 372.6
Agency Sec. 141.9 103.7 112.5 11.5 129.6 117.8
Corp. Bonds 168.4 195.4 151.0 232.6 265.5 281.6
----- ----- ----- ----- ------ ------
Subtotal 244.1 307.0 412.7 539.1 770.4 742.4
----- ----- ----- ----- ------ ------
Corp. Equities 193.6 121.5 54.2 36.9 57.6 119.0
----- ----- ----- ----- ------ ------
Total 437.7 428.5 466.9 576.0 828.0 861.4
===== ===== ===== ===== ====== ======
Above/Net Acquis. 45.5% 65.2% 62.9% 73.6% 66.0% 73.6%
----- ----- ----- ----- ------ ------
MEMO ITEM@
----------------
Loans to Corp-
orate Business -2.2 -1.6 10.1 -0.8 6.3 106.1
--------------------------------------------------------
DISTRIBUTION OF TREASURY/AGENCY ACQUISITIONS
--------------------------------------------------------
Treasury Securities
--------------------------------------------------------
Official -5.2 33.7 60.4 169.7 261.5 59.8
Private -65.3 -23.2 78.5 115.4 95.7 312.8
---- ---- ----- ----- ----- -----
Total -70.5 10.5 138.9 285.1 357.2 372.6
--------------------------------------------------------
Agency Securities
--------------------------------------------------------
Official 40.9 20.9 28.6 24.9 26.0 44.6
Private 101.0 82.8 83.9 -13.4 103.6 73.2
----- ----- ----- ---- ----- -----
Total 141.9 103.7 112.5 11.5 129.6 117.8
--------------------------------------------------------
*Source: "Flow of Funds Accounts of the United
States" (Federal Reserve "Z.1" release). 1Q05
figures are at seasonally adjusted annual rates.
@Although "Loans to Corporate Business" are
classified by the Federal Reserve as "Capital
Market Instruments," they have been excluded for
the purpose of this examination, since they lack
the liquidity of the other categories.
--------------------------------------------------------
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