Foreign private investors are shunning U.S. Treasury securities in favor of higher-yielding dollar-denominated assets, a trend that may weigh on U.S. government bond prices, analysts say.
In January, overall net foreign capital inflows into U.S. Treasuries sank to just $4.4 billion, the lowest in three years, the Treasury Department reported Wednesday.
While foreign central banks' net purchases of U.S. government debt in January totaled $8.4 billion, foreign private investors sold a net $4 billion of Treasuries.
"Private sector foreign investors are the biggest problem right now for the Treasury market. That is where the biggest question mark hangs," said Michael Woolfolk, senior currency strategist with Bank of New York.
Prices of long-term Treasury bonds have recently declined, partly because of investors' worries that inflation might creep upward. Falling bond prices mean rising yields.
In 2005, foreign net inflows into Treasury bonds and notes averaged $29 billion a month, according to Treasury data, so the January figure marked a sharp drop-off.
But foreigners remained avid buyers of other dollar-denominated securities in January.
The total net inflow of foreign capital into U.S. securities rose to $66 billion in January from a revised $53.8 billion in December, the Treasury Department said.
The net inflow into U.S. equities in January was $8.5 billion. Except for one month, that was the biggest equity inflow into U.S. stocks in four years, said Adam Cole, senior currency strategist with RBC Capital Markets in London.
Net purchases of U.S. long-term government agency bonds leaped to $26.7 billion from $11.6 billion in December.
Growing foreign demand for U.S. stocks and for riskier nongovernment bonds "both point to greater risk tolerance on the part of overseas investors in U.S. assets" and probably will mitigate downward pressure on the U.S. dollar, Cole said.
In order to fund the U.S. trade deficit, which hit a monthly record of $68.5 billion in January, money must enter the country in the form of portfolio inflows. Otherwise, the nation risks a steep fall in the dollar's value.