Much Better Than Expected Foreign Demand for U.S. Financial Assets in October

Foreign demand for U.S. securities rebounded in October, rising to$97.8B for the month. This compares with a consensus estimate of netforeign demand for total TIC flows of $30B, and follows a revisedlower net sell of -$32.8B the prior month. The improvement brings insufficient dollars to more than cover the US current account deficitin October. Unfortunately the trend in foreign demand has beendeclining, as the U.S. dollar has weakened, with the two year monthlymoving average of net foreign demand for U.S. securities at $61.5B,and the one year moving average decelerating to $49B.
When just the assets with maturities of over one year are examined,total demand rose to $114B in October, and increase of $99B over theprior month. Net long-term TIC flows are watched closely because theyare believed to indicate real investment, versus just short-term "hotmoney" flows. This was the third highest monthly net internationalbuying of long-term U.S. assets ever, only exceeded by the net $132Bpurchase in May of this year, and the $125B net purchase in August2006. But it follows the record selling of over $70B in August.
Demand for U.S. equities rose to a five month high of $30B in October,as the U.S. equity markets rallied to record highs. Demand for U.S.Treasuries essentially doubled from the prior month, rising to $49.8Bfrom $26.3B. Treasury yields fell, and prices rose, on the flight toquality buying as credit concerns pushed government yields lowerversus other credit instruments. Agency debt holdings grew moremodestly, increasing from $11.5B the prior month to $14.9B in October. Corporate bonds also experienced greater demand, rising to $23.1Bfrom $16.1B in September. Overall, improved demand was broad-based,but better quality credit instruments saw more benefit.
The Chinese continue to reduce their holdings of U.S. Treasuries.Chinese holdings fell -$8.6B in October, but other regions increasedtheir investments. Japan's Treasury position grew $9.8B, the U.K.position grew $30.5B, the Caribbean holdings rose $6.5B, and oilexporters added $4.6B in October.
When looking at only long-term securities, private investors increasedtheir purchases of U.S assets four and a half times faster thanofficial institutions. Central banks bought a total of $21.8B insecurities in October, while private investors added $96.2B. Forofficial purchasers, the largest accumulation was in government agencydebt and MBS at $10B for the month. Private investors loaded up on$45.9B of Treasuries followed by $29.9B of equities and $15.7B ofagency issuance.
Looking at U.S. investor demand for foreign securities, a weakening isapparent. U.S. investors sold $5B of foreign equities in Octoberafter purchasing over $21B in September. The demand for foreign bondsfell to $9B from almost $20B the prior month.
This morning's data indicates that the monthly average currentlyaccount deficit in the third quarter of this year was $59.5B,indicating a persistent $10B monthly deficit between U.S demand forforeign goods and foreign net demand for U.S. assets. The gap betweenthese two figures is watched to see how easily the U.S. can fund itsexternal obligations, which continue to grow.