Foreign Official Demand for Agency Debt Reaches New High in 1Q07

Long-term purchases of U.S. securities rose almost $9 billion in March versus February, due to greater demand for agencies and Treasuries. But, total demand for long and short-term securities fell by over 50% between February and March. Total net TIC flows were revised higher in February to $101.5 billion (from $94.5 billion previously), but fell to $45 billion in March.

Net purchases of notes, bonds, and equities rose to $67.6 billion in March from $58.1 billion in Feb. But when Treasury bill and other short-term securities are included, net demand fell to only $45 billion in March.

Bond and note demand was supported by the belief that U.S. interest rates are likely to fall in the future as the U.S. economy slows. U.S. T-note and T-bond demand more than doubled to $35.1 billion from $16.9 billion the prior month. Agency debt holdings rose $2 billion to $15.5 billion. Demand for U.S. corporate bonds fell almost 7% MoM to $42.4 billion. Foreign purchases of stocks rose $1.3 billion to $14.8 billion versus the previous month.

Both public and private demand by foreigners rose in March by over $20 billion each. Japan, China, the U.K. and oil exporters all increased their U.S. Treasury holdings in March. U.K. holdings rose a substantial $26 billion in March, the Caribbean added $18 billion (presumed to be hedge funds), and Brazil added $10 billion. China lagged at $4 billion.

U.S. investors bought a record $32.2 billion of foreign bonds in March, which doubled the total purchases of overseas assets by U.S. investors to $40.b billion in March from $19.8 billion in Feb.

Foreign demand for U.S. assets rose in the first quarter of 2007 versus the fourth quarter of 2006. Private sector foreign demand for U.S. Treasuries and Equities were relative strong in the first three months of this year, but private demand for agency securities has slowed. Luckily, central bank demand for agencies rose to a record high $33 billion during the first quarter of 2007.

Foreign flows continue to remain sufficient to cover the U.S. current account gap.