Foreign sales drop for U.S. bonds, notes

Foreign investors bought a net of $19.2 billion in long-term U.S. securities in July, the lowest amount in seven months, the Treasury Department said Tuesday, suggesting that the credit crisis is denting demand for U.S. assets.

Demand for long-maturity securities such as bonds, notes and equities hit its lowest level since December and fell sharply from the downwardly revised $97.3-billion net inflow reported in June.

Economists had expected the figure to fall to $85 billion, according to a Reuters poll.

Net purchases of U.S. corporate bonds hit their lowest level since December 1995, and purchases of securities issued by government-chartered mortgage giants such as Fannie Mae also fell sharply.

“The real culprit here is the credit crunch, which has caused a drastic slide in purchases of corporate and agency bonds, and I think it’s only a taste of what’s to come because the real problems didn’t hit until August,” said David Powell, senior currency strategist at IDEAglobal in New York.

A credit squeeze prompted by losses on debt backed by risky U.S. mortgages intensified in August and has since rattled world financial markets.

Including short-term securities such as Treasury bills, foreigners bought a net $103.8 billion in July, enough to cover that month’s $59.25-billion trade deficit. The net purchases were up from June’s downwardly revised $34.4 billion.

Official foreign investors grew particularly wary of U.S. corporate bonds in July, with their net purchases falling to the lowest level since December 1995.

The report also showed $9.37 billion in net sales of U.S. Treasuries, with official foreign institutions the biggest sellers, shedding $6.9 billion.

Official foreign purchases of U.S. equities edged up to $2.82 billion in July from $1.66 billion the previous month.

“That’s an indication that foreigners haven’t lost all hope in terms of the U.S. economic growth story and still believe in the outperformance of U.S. stocks,” Powell said.