Summary
Based on the Federal Reserve's latest flow-of-funds data, the United States came out of the second quarter owing the rest of the world a stunning $5.2 trillion more than the rest of the world owed it. This marked an increase of more than $600 billion from a year earlier. Making these numbers even more horrific, though, is that as recently as roughly 20 years ago, the United States was still a net creditor nation.
___
Introduction
Yesterday, the Federal Reserved released the latest edition of its publication "Z.1," "Flow of Funds Accounts of the United States." The most recent data are through the quarter ended 6/30/05. Before moving on to an 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, and they go a long way towards explaining Alan Greenspan's Treasury yield and yield curve "conundrum," as do some of the results from this year's first half.
* During 2004, foreign investors absorbed an extraordinary 98.9% of all Treasury issuance, a net of $358.5 billion acquired, versus a net of $362.5 issued.
* Foreigners also absorbed a very large proportion of the issuance of US agency securities, 89.2%, a net of $104.8 billion acquired, versus net issuance of $117.5 billion.
* Thus, combined foreign purchases of Treasuries and agencies equaled a whopping 96.5% of total issuance, $463.3 billion, versus $480.0 billion.
* As for the purchase of corporate bonds, foreign investors took down a net of $254.4 billion, 42.8% of total net issuance of $594.9 billion.
* Finally, foreign investors bought a net of $61.9 billion of US corporate equities, versus net issuance of minus $48.7 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 $409.7 billion or about 113% of total issuance of $362.5 billion. Obviously, this had a highly favorable on-balance influence on Treasury yields during 2004, but one materially lacking in traditional open-market characteristics. This results from combined foreign "official" (largely central bank) and Federal Reserve purchases of Treasuries of $323.9 billion, equal to 89.4% of last year's total Treasury issuance. Central banks are generally not very price-sensitive buyers.
A Look at the Latest Numbers
* As of 6/30/05, foreign investors held a total of $10.416 trillion of US financial assets, up $246 billion from revised holdings of $10.170 trillion as of 3/31. From 6/30/04, the increase was almost $1.5 trillion, or 16.6%. (See Table 1 in the table appendix at the end of the text.)
* As of 6/30/05, foreign financial liabilities totaled $5.243 trillion, resulting in a net foreign claim against the US of $5.173 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 6/30, these totaled $6.988 trillion, a very meaningful 67.1% 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 6/30/05, foreign investors held the following respective percentages of total outstandings of Treasuries, agencies, US corporate bonds and US equities: 45.0%, 13.4%, 27.7% and 14.3%. Combined holdings of Treasuries and agencies were 26.7% 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%, 6.2%, 13.9% and 7.0%. At that time, the combined holdings of Treasuries and agencies were 13.6% of total outstandings.
The table below breaks out these percentages as of 6/30/05, as of the end of last year, as of the end of the year-earlier June quarter, as well as of 12/31/94.
Summary: Foreign Holdings to Total Outstandings
-----------------------------------------------------
06/30/05 12/31/04 06/31/04 12/31/94
--------------------------------------
Treasuries 45.0% 43.5% 42.9% 18.3%
Agencies 13.4% 12.2% 11.2% 6.2%
-----------------------------------------------------
Treas. + Agcy. 26.7% 25.1% 24.0% 13.6%
-----------------------------------------------------
Corp. Bonds 27.7% 26.8% 25.8% 13.9%
Corp. Equities 14.3% 13.9% 13.4% 7.0%
-----------------------------------------------------
* As of 6/30/05, the 15 largest foreign holders of US Treasury debt had total holdings of $1.702 trillion, a gain of almost $42 billion or 2.5% from 3/31. This was less than half the increase for the quarter ended 3/31. (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 $1.258 trillion of US financial assets. During 2005's second quarter, this figure fell to an annual rate of $973.3 billion, almost $285 billion or 22.6% below last year's record level.
* During this year's second quarter, a very high 76.9% of US financial-asset acquisition by foreign investors was in highly marketable (therefore, highly liquid or "exposed") asset classes. This was up sharply from 64.4% for all of 2004, and it was far above the five-year average of 60.6% for the period running from 2000 through 2004, inclusive.
* During the June quarter, foreign investors ("official" and "private") acquired a net of $34.2 billion in Treasury debt. In turn, this equaled 19 times the $1.8 billion the Treasury issued during the period.
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Table Appendix
Table 1.
------------------------------------------
FOREIGNERS' U.S. FINANCIAL
ASSETS/LIABILITIES
(Billions of Dollars, Latest Data
Released 09/21/05 Through 06/30/05)
------------------------------------------
Total Total
Financial Financial
Assets Liabilities Difference
------------------------------------------
2005
06/30 10416.0 5243.3 5172.7
03/31 10169.7 5082.9 5086.8
------------------------------------------
As of
12/31
-----
2004 9787.9 4928.2 4859.1
2003 8381.2 4168.1 4213.1
2002 7576.8 4070.1 3506.7
2001 7065.9 3657.4 3408.5
2000 6584.9 3475.5 3109.4
=======================================
1990 2001.0 1388.8 612.2
---------------------------------------
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).
------------------------------------------
Table 2.
-----------------------------------------------
FOREIGN HOLDINGS OF US FINANCIAL ASSETS
AS OF 06/30/05 (Billions of Dollars
-- Latest Data Released 09/21/05)
-----------------------------------------------
% of
Total
Total US Financial Assets -----
Held by Foreign Investors 10416.0 100.0
===============================================
Credit-Market Instruments# 4893.3 47.0
------ ----
Open Market Paper 141.3
US Govt. Securities 2853.1
Treasury 2023.8
Agency 829.3
US Corporate Bonds 1898.9
-----------------------------------------------
US Corporate Equities 2094.9 20.1
------ ----
Credit-Market Instr.
+ Corp. Equities 6988.2 67.1
====== ====
-----------------------------------------------
Detail of US Government Securities
-----------------------------------------------
Treasury 2023.8
Official 1297.5
Private 726.3
Agency 829.3
Official 285.6
Private 543.7
------
2853.1
======
-----------------------------------------------
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 06/30/05, this category had tot-
al outstandings of $172.0 billion.
-----------------------------------------------
Table 3.
----------------------------------------
15 LARGEST FOREIGN HOLDERS OF U.S.
TREASURY DEBT AS OF 06/30/05, VS. THE
SAME COUNTRIES' HOLDINGS AS OF 03/31/05
(Amounts in Billions of $s)*
----------------------------------------
06/30 03/31
Country 2005 2005
----------------------------------------
( 1) Japan 681.3 680.5
( 2) Mainland China 243.7 223.5
( 3) United Kingdom 144.9 122.2
( 4) Caribbean Bank-
ing Centers@ 107.2 137.2
( 5) Taiwan 71.2 71.1
( 6) Germany 61.1 56.0
( 7) Korea 59.6 57.7
( 8) OPEC 57.3 62.2
( 9) Hong Kong 48.2 45.2
(10) Norway 45.3 16.9
(11) Canada 43.6 38.4
(12) Switzerland 39.4 44.1
(13) Luxembourg 38.5 42.2
(14) Mexico 31.9 32.5
(15) Singapore 28.9 30.7
----------------------------------------
Total 1702.1 1660.4
----------------------------------------
*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 06/30/05*
(Billions of Dollar)
--------------------------------------------------------
Years Ended December 31
------------------------------ 06/30
2000 2001 2002 2003 2004 2005*
----- ----- ----- ----- ------ ------
Net Acquisition
of Finan. Assets 963.0 657.7 767.8 842.9 1258.4 973.3
================= ===== ===== ===== ===== ====== =====
Credit-Market
Instruments
----------------
Open-Mkt. Paper 4.3 -2.6 10.3 7.0 30.6 47.8
Treasury Sec. -70.5 10.5 138.9 288.9 358.5 136.9
Agency Sec. 141.9 103.7 112.3 6.5 104.8 167.9
Corp. Bonds 168.4 195.4 151.0 230.0 254.4 346.3
----- ----- ----- ----- ------ -----
Subtotal 244.1 307.0 412.5 532.4 748.3 698.9
----- ----- ----- ----- ------ -----
Corp. Equities 193.6 121.5 54.1 35.0 61.9 50.0
----- ----- ----- ----- ------ ------
Total 437.7 428.5 466.6 567.4 810.2 748.9
===== ===== ===== ===== ====== =====
Above/Net Acquis. 45.5% 65.2% 60.8% 67.3% 64.4% 76.9%
----- ----- ----- ----- ------ -----
MEMO ITEM@
----------------
Loans to Corp-
orate Business -2.2 -1.6 10.1 -0.8 6.3 51.2
--------------------------------------------------------
DISTRIBUTION OF TREASURY/AGENCY ACQUISITIONS
--------------------------------------------------------
Treasury Securities
--------------------------------------------------------
Official -5.2 33.7 60.5 184.9 272.6 90.9
Private -65.3 -23.2 78.4 104.0 85.9 46.0
---- ---- ----- ----- ----- -----
Total -70.5 10.5 138.9 288.9 358.5 136.9
--------------------------------------------------------
Agency Securities
--------------------------------------------------------
Official 40.9 20.9 30.5 39.9 38.5 86.5
Private 101.0 82.8 81.8 -33.4 66.3 81.4
----- ----- ----- ---- ----- -----
Total 141.9 103.7 112.3 6.5 104.8 167.9
--------------------------------------------------------
*Source: "Flow of Funds Accounts of the United
States" (Federal Reserve "Z.1" release). 2Q05
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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