Reply #11: Foreign Buying of Treasuries Fell in December

[RawMaterials]

Japan and many hedge funds were sellers of Treasury securities in December, and China slowed its purchases significantly, according to new Treasury data. Over all, purchases by foreigners of Treasury securities plunged 75 percent, to $8.4 billion, from November.

That could have been bad for the Treasury market. But it was not, as the monthly flow of foreign funds into the United States continued to produce market results counter to expectations. For investors in the Treasury market, this has been positive because longer-term interest rates have remained lower than might have been predicted.

Indeed, the price of the 10-year note rose in December, and the yield dropped to 4.22 percent, from 4.35 percent at the end of November.

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This year the dollar has rebounded, rising 4.1 percent against the euro and 1.7 percent against the yen. At the same time, the yield on the 10-year note has fallen to 4.10 percent from 4.22 percent. So if the government reports that net foreign funds have slowed further in January and February, the link between the foreign funds flow and the Treasury and foreign exchange markets may be even more difficult to explain.

The reason that the flow of foreign money has been watched so closely is the fear that if it slows it would not be enough to cover the current-account deficit, a fear that was heightened by comments in November by Mr. Greenspan. If there was such a slowdown, interest rates would rise and the dollar would fall, analysts say.

http://www.nytimes.com/2005/02/16/business/worldbusiness/16flow.html?