Investors cool on US bonds and equities

By Sarah O’Connor in Washington
Published: June 16 2009 00:52 (Financial Times)

Foreign governments and private investors dramatically reduced their purchases of US assets such as Treasuries in April, choosing instead to make riskier investments elsewhere.

Investors rushed to buy US government debt this year as the global economy teetered and they sought a safe place to park their money. That drove down Treasury yields which in turn reduced the interest rate on mortgages and helped stabilise the country’s collapsing housing market.

But as conditions have started to improve, the appetite for risk has risen, spurring governments and other investors to move their money into higher-yielding assets outside the US.

This was particularly the case for short-term securities such as Treasury bills, which mature in less than a year. Foreign holdings of Treasury bills fell $44.5bn in April according to data released on Monday by the US Treasury; they rose by almost $50bn in the previous month.

“With the global economy pulling back from the perceived precipice in early 2009, relative risk perceptions changed dramatically in favour of equities, particularly emerging market equities, and [this] report for the most part reflects these rapid changes in investor preferences,” said Brian Bethune, chief financial economist at IHS Global Insight.

Net overseas purchases of long-term US securities such as long-dated Treasuries and equities dropped from $56.4bn in March to $34.3bn in April. Of that, foreign governments reduced their purchases from a net $26.4bn in March to $16bn in April.

China, the largest holder of Treasuries, decreased its stockpile of US government bonds by more than $4bn to $763.5bn, while Japan and Russia also reduced their holdings slightly.

The move away from US Treasuries has reversed the virtuous circle that developed this year. Waning demand has forced yields higher and pushed up mortgage rates, which could snuff out the flickers of improvement in the housing market. This is in spite of the Federal Reserve’s efforts to keep rates low by buying up Treasuries.

US investors have been sending their money abroad, too. US residents bought a net $23bn in long-term foreign securities in April, up from just $1bn the previous month.

Alan Ruskin, economist at RBS Greenwich Capital, said the data helped explain why the US dollar had slid in value as the global economy’s prospects brightened. “By now, the likely stock adjustment out of Treasury bills into riskier assets is probably reasonably well advanced, but even then it is still likely to act as a significant US dollar headwind,” he said.