US treasury data on cross-border financial flows for April shows that residents have started buying foreign securities in a big way for the first time since the collapse of Lehman Brothers Holdings Inc.
In April, US residents purchased foreign equities worth a net $9.2 billion (Rs43,976 crore), the highest figure since May 2008, when they purchased a net $18.1 billion. This return of US investors’ appetite for foreign securities and bonds has sparked the rally in our markets.
Since last May, US residents have been big sellers of foreign equities. They sold a net $16.9 billion last July, a net $21.7 billion in October and $21.3 billion in November. In fact, in the 12 months between May 2008 and April, US residents have sold a net $38.5 billion worth of foreign equities.
In contrast, the amount of net purchases of foreign equities by US residents between May 2007 and April 2008 was $79.1 billion. And in the previous 12 months, between May 2007 and April 2008, US residents bought a net $99.1 billion worth of foreign equities.
A similar story is seen in US purchases of foreign bonds. These surged to a net $13.8 billion in April and have been responsible for the decline in risk premiums seen in the JPMorgan EMBI+ Index, which has fallen from about 700 basis points over US treasurys last October to a bit more than 400 basis points currently.
One basis point is one-hundredth of a percentage point.
The bigger picture lies in the net monthly flows, which were negative to the tune of $53 billion in April, showing that foreigners’ appetite for US assets, including short-term assets, was lower than US demand for foreign assets. This is the third time in four months this figure has been negative.
Brad Setser, a US economist who tracks this data, writes in his blog: “Very modest demand for the US financial assets from the rest of the world is creating ongoing pressure for the US to adjust—that is for the US trade deficit to fall.” That will not be good news for Asian exports.
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