The primary buyers of the Treasury notes and bonds that the U.S. government issues to cover the shortfall between government spending and tax receipts, are foreign investors that generally pay for the bonds with dollars obtained by selling more goods and services to the U.S. than they purchase.

Over the decade, 1995-2004, the U.S. Treasury issued $905 billion in federal government securities, while the rest of the world bought $1,275 billion of these bonds. Foreign investors made up the difference by buying Treasury securities from U.S. individual investors and commercial banks in the secondary market.

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From Federal Reserve Flow of Funds Table F119, we see that State and Local Government Employee Retirement Funds were selling stocks and buying bonds during Q3 2005.

Since stock prices were rising and bond prices were falling during the quarter, this contrarian asset management behavior is another indication that smart investors were getting out of equities in Q3 2005.

(See also: “Private Pension Funds Continue to Sell Equity Holdings: Q3 2005“.)

Because issues of money market mutual fund shares for the quarter were only $0.2 billion, net, the major activity in this instrument was the shifting of ownership between sectors.

Prior to 2002, net annual issues of money market mutual fund shares were strongly positive, averaging over $300 billion (1999-2001). Since 2002, because of the Federal Reserve low interest rate policy, net redemptions of money market mutual fund shares ran at an average annual rate of about $309 billion.

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