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Trade Deficit Helps Stabilize Bond and Equity Markets: 2005

Posted By John Schroy On 15th March 2006 @ 10:49 In Treasuries, Open Market, Corporate Bonds, Equities, Foreign Investors | Comments Disabled

Foreign funds created by the record U.S. trade deficit of $726.9 billion in 2005 were channeled mainly into the U.S. bond market. This went a long way towards keeping bond prices up, despite massive net corporate bond issues connected with asset-backed securities (mostly mortgage related) that also set impressive records: $462.9 billion.

Foreign investors purchased (net) $214.1 billion in U.S. Treasury securities and $351.1 billion in corporate bonds. (See: Federal Reserve national flow of funds [1] account F107.)

It is interesting to note that foreign issuers sold (net) $137.5 billion in foreign corporate equities traded in the U.S. (including ADRs), also a record level, despite higher costs with the Sarbanes-Oxley Act.

It seems that the trade deficit and foreign issuers were instrumental in maintaining price stability in the U.S. capital market in 2005.

  • In the bond markets, foreign investors bought up massive issues of mortgages and other debt instruments that threatened to sink bond prices.

  • In the equity markets, new issues by foreign corporations helped neutralize record levels of stock buybacks by domestic corporations, keeping stock prices from soaring above already high levels.

Tags: [2] asset backed securities, [3] bond issues, [4] foreign investors, [5] sarbanes oxley, [6] stock buybacks, [7] trade deficit
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[1] account F107: http://capital-flow-analysis.info/flow-of-funds/F107.htm
[2] asset backed securities: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=asset-backed-securities
[3] bond issues: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=bond-issues
[4] foreign investors: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=foreign-investors
[5] sarbanes oxley: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=sarbanes-oxley
[6] stock buybacks: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=stock-buybacks
[7] trade deficit: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=trade-deficit
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