Foreigners Increase U.S. Securities Purchases in June

Aug. 16 (Bloomberg) -- International investors stepped up purchases of U.S. securities in June for the first time in five months amid faster economic growth than in Europe and Japan.

Net purchases rose to $71.8 billion from a revised $65.2 billion in May, the Treasury Department said. Foreigners bought $40.5 billion of Treasuries as the yield on the benchmark 10-year note climbed to near its highest in two years.

The increase came as economic growth in Japan and the euro region faltered in the second quarter. The purchases may help alleviate concern about the attractiveness of U.S. assets after a government report Friday showed the U.S. trade deficit widened to a record, said Stephen Jen, head of currency research at Morgan Stanley in London.

``Some investors are too fixated on the U.S. deficit,'' said Jen, who used to work at the International Monetary Fund and Federal Reserve. ``If you look at the demand for dollar assets and U.S. Treasuries, it's hard to say people have a lot of fears about financing the U.S. deficit.''

Demand for U.S. assets rose as the Fed lifted its interest rate target to 1.25 percent from 1 percent, the lowest since 1958, helping to send the yield on the benchmark 10-year Treasury note to 4.87 percent on June 14 from 3.68 percent on March 16. The Standard & Poor's 500 Index gained 1.8 percent in June. Overseas investors bought a net $1.9 billion of stocks.

`Relatively Positive'

Against the euro, the dollar gained to $1.2344 at 12:32 p.m. in New York from $1.2374 on Friday. The U.S. currency traded at 110.68 yen after earlier trading at 110.35. This morning, the dollar declined after a measure of manufacturing in New York fell to the lowest in more than a year.

``It's relatively positive news for the dollar,'' said Mitul Kotecha, head of global currency research in London at Calyon, the investment-banking unit of Credit Agricole SA. ``Against the big blowout on Friday, it looks like the trade deficit can be financed by portfolio capital.''

Japan bought a net $21.2 billion of Treasuries in June, up from $15.7 billion in May. Japan is the largest foreign holder of Treasuries, accounting for $689 billion, followed by China, with $164.8 billion. China purchased a net $700 million of Treasuries in June, down from $3.1 billion the month earlier.

Japan increased its ownership of Treasuries even as the Bank of Japan, the country's central bank, refrained from selling its currency and buying dollars for a fourth month.

Japanese Appetite

The BOJ tried to hold down the value of its currency by selling for U.S. dollars about $290 billion worth of yen in the first three months of the year, investing much of proceeds in Treasuries. China buys dollars to ensure its currency, the yuan, stays at a value of about 8.3 to the dollar.

Gains in the dollar from the Treasury figures on foreign purchases may be short-lived, said Steven Saywell, senior currency strategist at Citigroup Inc. in London. The widening U.S. current- account deficit, the broadest measure of trade because it includes investment, will weaken the dollar to $1.29 in six months and $1.32 in a year, he said.

``The data suggest we are seeing stabilization of portfolio flows into the U.S,'' Saywell said. ``But you have to weigh this up against the massive funding needs of the trade deficit reported on Friday. This is consistent with a slow creep lower in the dollar.''

Traders rely on the figures as a gauge of the appetite of international investors for U.S. assets and the currency to buy them. The dollar dropped the most against the euro in more than 2 1/2 years on Nov. 18 when the Treasury said September holdings tumbled.

Trade Gap

The U.S. trade deficit ballooned in June to a record $55.8 billion as imports of crude oil surged and slowing growth in Japan and Europe curbed export demand. The gap in goods and services trade follows a $46.9 billion shortfall in May, the Commerce Department said in Washington.

The increase in purchases came as growth in Japan and the euro region faltered. Gross domestic product in Japan rose at an annual 1.7 percent pace in the second quarter, less than half the forecast of economists. In the euro region, the pace of expansion cooled to 0.5 percent from the first three months of the year. The U.S. economy grew at an annual 3 percent pace.

Foreign investors stepped up their purchases of U.S. stocks and domestic investors bought $7.5 billion in foreign stocks in June, resulting in a net equity outflow of $5.6 billion. This was the fourth consecutive month that net flows in the equity market were negative.

`Discouraging'

``It is discouraging that there was a net outflow of equity- related investments,'' said Jason Daw, a currency strategist in New York at Merrill Lynch & Co. He expects the dollar to fall to $1.25 per euro by the end of September and $1.29 by year-end.

Total purchases of domestic securities were $1.34 trillion in June, while sales were $1.25 trillion. Purchases of all securities were $1.63 trillion versus sales of $1.558 trillion, resulting in the net of $71.8 billion.

The total figures include Treasury notes and bonds, debt of so-called agencies such as Fannie Mae and Freddie Mac, corporate bonds and stocks, and the stocks and bonds of foreign companies bought from U.S. investors.

Overall, foreign investors bought a net $40.5 billion of Treasuries in June, up from $29.3 billion in May. Net holdings of U.S. equities rose for the first time in four months.

Treasury said it revised the monthly data back to January 2003. After the revisions, the total net purchases of U.S. assets was $788.2 billion for the 12 months ended in June, up from $694.7 billion for the year ended June 2003.

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