What did American investors as the US dollar was rallying in September and foreign investors bought a record amount ($164 bln) of long-term US securities? Why they were buying a record amount of foreign bonds and stocks.
This Great Graphic, created on Bloomberg, shows two time series. The white line is net buying of foreign equities, and the yellow line is the net buying of foreign bonds over the past decade according to monthly Treasury’s International Capital (TIC) report.
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Americans bought $30 bln of foreign shares in September. Before 2000, the most was about $10 bln. The previous high was set in the notorious October 2008, when Americans bought $21.4 bln of foreign equities.
Americans bought $40 bln of foreign bonds in September. Since 2007, investors bought around $30 bln on two occasions. Before 2000, there was only one month in which Americans bought more than $15 bln of foreign bonds.
One explanation is that American investors took advantage of the dollar’s rally to scoop up foreign assets on the cheap. It could be the dollar’s contemporaneous performance was irrelevant, and that the purchases were done mostly on a hedged basis, based on anticipated futures trajectory of the dollar. Previously it was difficult for retail investors to hedge their foreign equity holdings, but ETFs have been developed that allow investors to buy the Nikkei and hedge the yen, such as DXJ and HEDJ, which does the same thing for European equities (Full disclosure: I own both and this is not a recommendation).
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The monthly swings of US purchases has become more volatile. This lower chart shows the same two time series going back to 1985. The liberalization of the capital flows associated with Reagan-Thatcher did not translate into US purchases/sales of foreign assets until the early 1990s. In recent years the volatility of the flows has increased, even though market volatility has not. Consider that in March this year, Americans sold a record amount of foreign shares (~$57.5 bln), and as we saw in September, they bought a record amount.
Separately, a few other highlights of the TIC report include foreign central banks sold $30.6 bln of US Treasury securities, roughly divided equally between bills ($17.5 bln) and bonds and notes ($13.2 bln). The most likely explanation is not the diversification out of the US, but rather a number of central banks are believed to have intervened in the foreign exchange market to slow their currencies’ depreciation.
Another interesting highlight is the fact that despite the decline in oil prices, which saps the income of oil producers, OPEC bought about $12 bln of US bonds, offsetting in full the sales by Japanese investors ($9 bln) and Chinese investors ($3 bln) combined. German investors bought $6 bln of US Treasuries, which offset the sales by Belgium. Russia sold $400 mln of US Treasuries, much less than one would expected given the central bank’s intervention and seeming desire reduce the reliance on the dollar.
