Foreigners Buy $5.8B in US Bonds in Sept

Outflows hit a high of $86.7 billion in August as credit markets were rocked by fallout over the U.S. subprime mortgage crisis.

The monthly Treasury International Capital report highlights cross-border acquisitions of securities with maturities of more than one year, including non-market flows such as stock swaps and principal repayment on asset-backed securities.

The closely watched figure that excludes such non-market flows recorded net buying of $26.4 billion in long-term U.S. securities, after a record outflow of $70.6 billion in August, according to the report, known as TIC.

The report's most comprehensive category, monthly net TIC flows, includes non-market flows, short-term securities and changes in banks' dollar holdings. This measure of net foreign capital outflow was $14.7 billion in September, though still below the record outflow of $150.7 billion the previous month.

Financial market analysts consider the monthly data from the Treasury Department to be a significant but imprecise gauge of how easily the U.S. can finance its trade deficit. The September TIC flow compares with the $56.45 billion trade deficit during the month, reported last week by the Commerce Department.

"I expected a more sizable rebound than what we actually got," said Michael Woolfolk, senior currency strategist with The Bank of New York Mellon, citing the $26.4 billion in buying of long-term market flows. "It may reflect the fact that the August liquidity crisis and investor behavior prompted by that spilled over in the first part of September, before the Fed's cut."

The Federal Open Market Committee slashed the benchmark fed funds rate by half a percentage point on Sept. 18, then followed with quarter-point cut last month to bring the rate down to 4.5 percent. The initial move triggered a relief rally in markets, though volatility has recently returned in bouts amid ongoing concerns about the impact of the subprime woes on major banks.

Woolfolk called the concern about financial institutions an "aftershock" that should have been anticipated, and he expects inflows to resume in coming months.

"We still don't see any crisis of confidence either in the dollar or in the safety and security of dollar-denominated securities," he said.

Currency and bond markets had a muted reaction to the report, which was overshadowed by an unexpected drop in U.S. industrial output last month.

However, Raymond Remy, head of fixed income at Daiwa Securities America, said that if the TIC data remains weak in coming months, the market will have to start paying attention to it.

"I don't think the bounceback from a very poor last month was enough," he said of the September figures.

Within the long-term securities category, foreign net purchases of U.S. Treasury notes and bonds was $26.3 billion in September, compared with net sales of $2.8 billion in August.

Private foreign investors bought a net $11.5 billion in Treasury notes and bonds in September, down from $27.1 billion the previous month. Meanwhile, foreign official institutions such as central banks bought a net $14.6 billion of these Treasurys, compared with net sales of $29.7 billion the previous month.

Net foreign purchases of debt issued by U.S. government-sponsored agencies like Fannie Mae and Freddie Mac totaled $11.5 billion in September, up from $8.4 billion in August.

For U.S. equities, net foreign purchases totaled $2.5 billion in September, compared with sales of $40.7 billion the previous month.

For corporate bonds, net foreign purchases were $15.1 billion, versus sales totaling $934 million the previous month.

Net foreign equities and bonds sold by U.S. residents -- which affect the overall net inflow figure -- was $29 billion in September, after sales of $34.5 billion in August.

Total foreign holdings of Treasury bills, notes and bonds was $2.247 trillion at the end of September, up from $2.231 trillion the month before. Foreign official holdings of Treasury bills, notes and bonds rose to $1.440 trillion from $1.428 trillion the previous month.

Japan remained the largest holder of U.S. Treasury securities, though its holdings fell to $582.2 billion in September from $585.6 billion in August.

China was still the second-largest holder of U.S. Treasurys, though its stake declined to $396.7 billion from $400.2 billion. The U.K. remained in third place with holdings down to $226.4 billion from $244.0 billion.

Treasury holdings in Caribbean banking centers, which are associated with investment funds, fell to $71.4 billion in September from $76.3 billion the month before.

Treasury holdings by "oil exporters" -- a group mainly comprised of the Organization of Petroleum Exporting Countries -- rose to $125.7 billion from $123.3 billion in August. South Korea's Treasury holdings fell to $45.7 billion from $48.9 billion.

With each release -- typically around the 11th business day of the month -- Treasury also revises the previous month's data.

The next report, covering October, is scheduled to be released Dec. 17.