Federal Reserve Flow of Funds Account Table F107 shows that the Rest of the World bought U.S. bonds on a grand scale during 2005.

This signaled a continuation of a long, steady trend of increased purchases of U.S. bonds by foreign investors since 1998, driven by an increasing trade deficit.

Over the decade 1995-2004, foreign investors have consistently favored U.S. corporate bonds, while showing changing preferences for agency and treasury bonds from year to year.

In 2005, purchases of U.S. Treasury bonds by foreign governments fell dramatically. However, the slack was taken up by foreign private investors. This shows that, in the short term, foreign central banks cannot really reduce foreign holdings of U.S. Treasuries, because to do so, they need to sell these bonds to someone and the most likely buyers are other foreigners.

The graph shows how the annual rate of foreign purchases of U.S. bonds more than quadrupled since 1998, keeping bond prices up and seeming to explain the ‘conundrum’ of bond prices that refused to fall in 1994, stumping Chairman Greenspan and other ‘experts’.

For a discussion on the trade deficit and bond prices, see “Trade Deficits Have Depressed Bond Yields For 20 Years.”

This entry was posted on Thursday, January 26th, 2006 at 9:32 am and is filed under Treasuries, Open Market, Agencies, Mortgages, Corporate Bonds, Foreign Investors. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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