Monday, June 15, 2009

International Demand for U.S. Assets Slowed in April

International purchases of American financial assets grew more slowly in April as China, Japan and Russia pared demand for Treasuries, underscoring the danger of U.S. reliance on foreigners to finance its fiscal deficit.

Total net purchases of long-term equities, notes and bonds rose a net $11.2 billion, compared with buying of $55.4 billion in March, the Treasury said today in Washington. International holdings of Treasuries increased a net $41.9 billion, compared with the $55.3 billion gain in March. Including bills, the holdings fell a net $2.6 billion.

Benchmark 10-year Treasuries, which rose after Russian Finance Minister Alexei Kudrin said it’s “too early to speak of an alternative” to the dollar, remained higher after today’s report. That indicates investors have yet to see evidence that international money managers are losing confidence in the currency that has proved a haven during the credit crisis.

“Talk that foreign central banks will diversify out of their dollar and Treasury holdings is so far just talk,” said Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York. “The worst financial crisis since the Great Depression is still ongoing and foreign investors and central banks still have a safe haven demand for U.S. Treasuries.”

Including short-term securities such as stock swaps, foreigners sold a net $53.2 billion of U.S. financial assets, compared with net buying of $25 billion the previous month.

Economists’ Forecasts

Analysts had anticipated international net purchases of long-term U.S. assets of $60 billion, according to the median of nine estimates in a Bloomberg News survey.

Ten-year U.S. notes advanced for a third day, sending their yields to 3.74 percent at 11:08 a.m. in New York. The yields surged as high as 4 percent last week, part of a sell-off since March that Federal Reserve Chairman Ben S. Bernanke has partly attributed to worries about ballooning federal deficits.

Chinese, Brazilian and Russian officials have expressed an interest in developing an alternative to the dollar as the world’s main reserve currency, in part citing the record American budget gap.

The Congressional Budget Office projects the federal budget shortfall will reach a record $1.85 trillion this year, with the gap exceeding $600 billion through the year 2019.

Holdings by Nation

China, the biggest foreign holder of U.S. Treasuries, trimmed its holdings of government notes and bonds by $4.4 billion to $763.5 billion. Russia’s holdings slipped by $1.4 billion to $137 billion and Brazil’s by $600 million to $126 billion. Japan, the second-biggest international investor, saw its total drop by $800 million to $685.9 billion.

“China and Russia both indicated a desire to diversify out of dollar denominated instruments, and April seems to have emphasized their current position,” said Michael Woolfolk, senior currency strategist at Bank of New York Mellon Corp. in New York.

The Treasury’s reporting on long-term securities captures international purchases of government notes and bonds, stocks, corporate debt and securities issued by U.S. agencies such as Fannie Mae and Freddie Mac, which buy home mortgages.

Foreign investments in U.S. agency debt slumped for the eighth time in 10 months, by $2.5 billion in April. Net purchases of American equities slowed to $4.6 billion in April from $13.2 billion the prior month. Holdings of corporate bonds tumbled a net $9.7 billion, the biggest decline since November.

Borrowing Costs

Waning demand for Treasuries may exacerbate a jump in yields that threatens to make it harder for the U.S. to pull out of its deepest recession in at least half a century. Yields on benchmark 10-year notes have climbed more than 1 percentage point since mid-March, contributing to an increase in mortgage rates that’s counteracting Fed efforts to aid the housing market.

“Should this continue on a steeper pace, Treasuries could take a big beating,” said Richard Yamarone, director of economic research at Argus Research Corp. in New York. “It’s something investors should watch with great interest.”

On a visit to Beijing on June 2, U.S. Treasury Secretary Timothy Geithner said there will be enough demand for record sales of U.S. debt. In March, Chinese Premier Wen Jiabao called on the U.S. “to guarantee the safety of China’s assets.” China’s central bank governor, Zhou Xiaochuan, has proposed the eventual creation of a new, supranational currency.

Russia’s Warning

Russian President Dmitry Medvedev questioned the dollar’s future earlier this month, saying it isn’t “in a spectacular position, let’s be frank, and its prospects cause various questions.” Alexei Ulyukayev, first deputy chairman of the bank, said June 10 that some reserves may be moved into bonds issued by the International Monetary Fund.

Still, Russian Finance Minister Alexei Kudrin said in an interview two days ago that the dollar is in “good shape,” and that “it’s too early to speak of an alternative” to the U.S. currency.

“There is kind of a political dimension and an economic dimension,” Axel Merk, president and portfolio manager at Merk Investments LLC in Palo Alto, California, said on Bloomberg Radio. “The folks who are actually on the line making the decisions, they are fully aware we are dependent on the dollar. It’s not going to change any time soon.”