Sunday, February 18, 2007

December sees $11 billion net capital outflow

ECONOMIC REPORT
MarketWatch

WASHINGTON (MarketWatch) -- U.S. monthly capital flows reversed in December to an outflow for the first time since June 2005, the Treasury Department reported Thursday.

The U.S. recorded an outflow of $11 billion in December, compared with an inflow of $70.5 billion in November, the Treasury said.

The U.S. economy has required big inflows of capital of about $70 billion every month to fund its large current account deficit, which totaled $225.6 billion in the third quarter -- about 6.8% of gross domestic product.

The large inflows of foreign capital have kept U.S. interest rates lower than they would otherwise be, boosting the real-estate sector and other asset markets with cheap money.

The dollar fell against yen and the euro following the report, which, according to Action Economics, "didn't sit too well" with the markets after Tuesday's report on the nation's growing trade gap and a Wall Street Journal report that China is considering shifting some of its $1 trillion in foreign reserves into riskier assets, such as corporate bonds, stocks and even commodities. See full story on currency markets.

The December flows data include both long- and short-term securities. The outflow resulted from total sales of $42.5 billion in securities by private investors, partially offset by $31.5 billion in purchases by official institutions.

U.S. residents purchased a net $47.4 billion in long-term foreign securities.

Net long-term capital inflows, meanwhile, fell to $15.6 billion in December from $84.9 billion in November. This marked the lowest inflow since January 2002.

Foreign private investors sold stocks in December, and they bought fewer Treasury bonds and corporate bonds.

Foreign central banks bought a record amount of government agency bonds to close out 2006.

Overall, foreign private investors bought $39 billion in long-term securities in December, compared with $115.7 billion in November. They purchased only $4.5 billion in Treasury bonds and notes in December, compared with $33.1 in the previous month, according to the data.

Foreign private investors sold $11.1 billion in equities in December, after having purchased $9.1 billion in November.

Foreign official institutions bought a record $15.5 billion in government agency bonds, up from $4 billion in the previous month.

A senior Treasury official noted that the monthly data are volatile and should be viewed over longer terms.

By Greg Robb
End of Story
Greg Robb is a senior reporter for MarketWatch in Washington.

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