International Demand for US Stocks and Bonds Rises to Record in May

Foreign purchases of long-term U.S. financial assets rose to a record $126.1 billion in May, an increase from the $80.3 billion purchased last month. The largest previous monthly long-term purchases were in August, 2006 at $120.9 billion. When net short-term purchases are included, the total increased to $105.9 billion in May, and April's purchases were revised down to $97.8 billion from the $111.8 billion originally reported. Purchases were focused on corporate bonds and stocks.

Private flows made up the total demand for total net flows into the U.S. in May as net foreign official flows actually were a negative -$2.8B. Private purchases more than doubled from the prior month to a record $152B in May. U.S. investors bought a net $37.3 billion of overseas assets, an increase of $20 billion over the prior month.

New record highs in the U.S. equity market helped fuel foreign demand for our stocks, which rose to $41.9 billion in May from a recent low of $8.7 billion in March. Demand for Treasury notes also rebounded, rising $21.6 billion from flat in April. Corporate bonds saw a more than doubling in demand to $72.6 billion in May from $33.5 billion in April, while agency debt and mortgages saw an almost $9 billion decline to $27.5 billion in May.

Foreign official holdings of Treasuries fell -$10 billion in May, fairly evenly split between T-Bills and T-Notes. The UK was the largest purchaser ($33B) by a large margin, followed by oil exporters at +$9B. China was a net seller of $6.6B, but this was swamped by hedge fund selling out of the Caribbean of -$28.5B. Japan is still the largest foreign holder of U.S. Treasury debt at $615B, followed by China at $407B. The UK trails in third place at $167B.

Foreign investor demand for U.S. assets continues to be sufficient to fund the trade deficit, which rose to $60B in May, even as the dollar weakens. The strong demand for long-term over short-term ( <1y) assets can be viewed as a sign of foreign faith in the U.S. economy.