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Summary
The latest batch of scary investment numbers regarding our friends abroad has arrived! Per the latest flow-of-funds data, released yesterday by the Federal Reserve, US financial assets held by foreign investors registered a sizable increase of $212 billion during this year's third quarter. As of 9/30, total holdings were reported at an enormous $10.681 trillion. Also as of 9/30, net foreign financial claims against the United States stood at $5.473 trillion, a very, very sizable jump of almost $637 billion during the September quarter, and an increase of a remarkable $1.25 trillion from a year earlier. It was roughly a mere 20 years ago that the United States was still a net creditor nation!
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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 9/30/05.
Before moving on to an examination of how foreign investors behaved during the third quarter, I want to freshen up some numbers from full-year 2004. They have been revised slightly in the latest report, but they continue to go a long way towards explaining Alan Greenspan's Treasury yield and yield curve "conundrum," as do some of the results for this year.
Numbers for Full-Year 2004
* 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, 41.5% of total net issuance of $612.4 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 $323.8 billion, equal to 89.3% of last year's total Treasury issuance. Central banks are generally not very price-sensitive buyers.
A Look at the Latest Numbers (3Q2005)
* As of 9/30/05, foreign investors held a total of $10.681 trillion of US financial assets, up $212 billion from revised holdings of $10.469 trillion as of 6/30. From 9/30/04, the increase was about $1.59 trillion, or 17.5%. (See Table 1 in the table appendix at the end of the text.)
* As of 9/30/05, foreign financial liabilities totaled $5.208 trillion, resulting in a net foreign claim against the US of $5.473 trillion. (See Table 1.)
* The 9/30 total foreign claim amount was equal to almost 49% of third-quarter US real gross domestic product. By comparison, as of the end of 1985, only about 20 years ago, net foreign financial claims were equal to about 1.5% of real GDP.
* 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 9/30, these totaled $7.354 trillion, a very meaningful 68.8% 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 9/30/05, foreign investors held the following respective percentages of total outstandings of Treasuries, agencies, US corporate bonds and US equities: 45.5%, 14.4%, 28.8% and 15.0%. Combined holdings of Treasuries and agencies were 27.6% 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 9/30/05, as of the end of last year, as of the end of the year-earlier September quarter, as well as of 12/31/94.
Summary: Foreign Holdings of Total Outstandings
-----------------------------------------------------
09/30/05 12/31/04 09/31/04 12/31/94
--------------------------------------
Treasuries 45.5% 43.5% 43.3% 18.3%
Agencies 14.4% 12.2% 11.3% 6.2%
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Treas. + Agcy. 27.6% 25.1% 24.3% 13.6%
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Corp. Bonds 28.8% 27.1% 26.8% 13.9%
Corp. Equities 15.0% 13.9% 13.6% 7.0%
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* As of 9/30/05, the 15 largest foreign holders of US Treasury debt had total holdings of $1.748 trillion, a gain of about $40 billion or 2.4% from 6/30. (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 $1.307 trillion of US financial assets. During 2005's third quarter, this figure fell to an annual rate of $1.006 trillion, a rate about $301 billion or 23.0% below last year's record level.
* During this year's third quarter, an extraordinarily high 97.4% of US financial-asset acquisition by foreign investors was in highly marketable (thus, highly liquid or "exposed") asset classes. This was up very sharply from 62.0% for all of 2004, and it was far, far above the five-year average of 60.2% for the period running from 2000 through 2004, inclusive.
* During the September quarter, foreign investors ("official" and "private") acquired a net of $52.9 billion in Treasury debt. In turn, this equaled 91.0% of the net $58.1 billion the Treasury issued during the period.
* During the third quarter, there was a large increase in foreign purchases of US equities, almost $40 billion during the quarter, versus $61.9 billion for all of last year. Moreover, the Treasury's "TIC" report for September indicated foreign stock purchases during that month were roughly $25 billion, which represented a major portion of foreign stock purchases for the entire quarter. Is it possible that this was "hot" money flowing into our equity market to "front-run" the late-year rally that was/is so heavily anticipated? If so, would this money bolt from our market if looked like the rally was over, and the market was rolling over to the downside?
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Table Appendix
Table 1.
------------------------------------------
FOREIGNERS' U.S. FINANCIAL
ASSETS/LIABILITIES
(Billions of Dollars, Latest Data
Through 09/30/05, Released 12/08/05)
------------------------------------------
Total Total
Financial Financial
Assets Liabilities Difference
------------------------------------------
2005
09/30 10680.9 5207.7 5473.2
06/30 10468.9 5232.5 4836.4
03/31 10180.5 5446.3 4734.2
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As of
12/31
-----
2004 9836.2 5333.5 4502.7
2003 8380.8 4501.1 3879.7
2002 7576.8 4276.2 3300.6
2001 7065.9 3747.0 3318.9
2000 6584.9 3562.3 3022.6
=======================================
1990 2001.0 1418.1 582.9
---------------------------------------
1985 967.4 873.0 94.4
1984 805.3 836.4 -31.1
---------------------------------------
1980 494.2 660.9 -166.7
1970 104.8 140.8 -36.0
1960 38.9 63.4 -24.5
1950 17.4 30.0 -12.6
=======================================
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 09/30/05 (Billions of Dollars
-- Latest Data Released 12/08/05)
-----------------------------------------------
% of
Total
Total US Financial Assets -----
Held by Foreign Investors 10680.9 100.0
===============================================
Credit-Market Instruments# 5098.7 47.7
------ ----
Open Market Paper 132.8
US Govt. Securities 2962.4
Treasury 2076.7
Agency 885.7
US Corporate Bonds 2003.5
-----------------------------------------------
US Corporate Equities 2255.2 21.1
------ ----
Credit-Market Instr.
+ Corp. Equities 7353.9 68.8
====== ====
-----------------------------------------------
Detail of US Government Securities
-----------------------------------------------
Treasury 2076.7
Official 1307.1
Private 769.6
Agency 885.7
Official 303.8
Private 581.9
------
2962.4
======
-----------------------------------------------
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 9/30/05, this category had tot-
al outstandings of $179.1 billion.
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Table 3.
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15 LARGEST FOREIGN HOLDERS OF U.S.
TREASURY DEBT AS OF 09/30/05, VS. THE
SAME COUNTRIES' HOLDINGS AS OF 06/30/05
(Amounts in Billions of $s)*
------------------------------------------------
06/30 06/30
Country 2005 2005 Change
------------------------------------------------
( 1) Japan 687.3 681.2 6.1
( 2) Mainland China 252.2 243.7 8.5
( 3) United Kingdom 182.4 145.5 36.9
( 4) Caribbean Bank-
ing Centers@ 102.9 106.8 -3.9
( 5) Taiwan 71.8 71.3 0.5
( 6) Germany 63.5 61.1 2.4
( 7) Korea 61.7 59.6 2.1
( 8) OPEC 54.6 57.0 -2.4
( 9) Hong Kong 48.1 48.2 -0.1
(10) Canada 47.8 43.8 4.0
(11) Luxembourg 41.3 43.1 -1.8
(12) Switzerland 37.5 40.1 -2.6
(13) Mexico 35.0 31.9 3.1
(14) Norway 33.4 45.3 -11.9
(15) Singapore 28.2 28.9 -0.7
------------------------------------------------
Total 1747.7 1707.5 40.2
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*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.
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Table 4.
--------------------------------------------------------
NET ACQUISITION OF U.S. FINANCIAL ASSETS
BY FOREIGN INVESTORS -- 2000 TO 09/30/05*
(Billions of Dollar)
--------------------------------------------------------
Years Ended December 31
------------------------------ 09/30
2000 2001 2002 2003 2004 2005*
----- ----- ----- ----- ------ ------
Net Acquisition
of Finan. Assets 963.0 657.7 767.8 842.5 1307.1 1006.1
================= ===== ===== ===== ===== ====== ======
Credit-Market
Instruments
----------------
Open-Mkt. Paper 4.3 -2.6 10.3 7.0 30.6 -34.0
Treasury Sec. -70.5 10.5 138.9 288.9 358.5 211.6
Agency Sec. 141.9 103.7 112.3 6.5 104.8 225.6
Corp. Bonds 168.4 195.4 151.0 230.0 254.4 418.1
----- ----- ----- ----- ------ ------
Subtotal 244.1 307.0 412.5 532.4 748.3 821.3
----- ----- ----- ----- ------ ------
Corp. Equities 193.6 121.5 54.1 35.0 61.9 159.1
----- ----- ----- ----- ------ ------
Total 437.7 428.5 466.6 567.4 810.2 980.4
===== ===== ===== ===== ====== ======
Above/Net Acquis. 45.5% 65.2% 60.8% 67.3% 62.0% 97.4%
----- ----- ----- ----- ------ -----
MEMO ITEM@
----------------
Loans to Corp-
orate Business -2.2 -1.6 10.1 -0.8 6.3 5.5
--------------------------------------------------------
DISTRIBUTION OF TREASURY/AGENCY ACQUISITIONS
--------------------------------------------------------
Treasury Securities
--------------------------------------------------------
Official -5.2 33.7 60.5 184.9 272.7 38.2
Private -65.3 -23.2 78.4 104.0 85.8 173.4
---- ---- ----- ----- ----- -----
Total -70.5 10.5 138.9 288.9 358.5 211.6
--------------------------------------------------------
Agency Securities
--------------------------------------------------------
Official 40.9 20.9 30.5 39.9 38.5 72.8
Private 101.0 82.8 81.8 -33.4 66.3 152.8
----- ----- ----- ---- ----- -----
Total 141.9 103.7 112.3 6.5 104.8 225.6
--------------------------------------------------------
*Source: "Flow of Funds Accounts of the United
States" (Federal Reserve "Z.1" release). 3Q05
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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