Investors Move Away from U.S. Assets

Summary: This year, investors rushed to buy United States government debt as global economy teetered. They sought a safer place to place their money, which in turn drove down Treasury yields, reduced mortgage interest rates, and helped stabilize the housing market. However, as conditions improve today, they are moving their money outside the U.S.

There is an increased appetite for risk, spurring investors and governments to invest in higher-yielding assets outside U.S.

According to data released by U.S. Treasury yesterday, Treasury bills foreign holdings fell in April amounting to $44.5 billion. The shunning away from U.S. investments was particularly evident in these short-term securities, which mature before one year.

“Relative risk perceptions are changing dramatically in favor of the equities (particularly those emerging market equities), with global economy pulling back away from perceived precipice early 2009,” said IHS Global Insight chief financial economist, Brian Bethune.

Overseas, net purchases of U.S. long-term securities such as long-dated equities and Treasuries dropped from $56.4 billion in March to $26.4 billion in April. With this, foreign governments reduced their net purchases from $26.4 billion in March to $16 billion in April.

One of the largest Treasuries holders, China, decreased its U.S. government bonds stockpile by $4 billion to $763.5 billion. In addition, Russia and Japan also slightly reduced their holdings.

This move away from the U.S. Treasuries has several negative effects. For one, it has reversed the praiseworthy circle developed this year. The waning demand has also forced higher yields resulting to a lot of pushed up mortgage rates, which could eventually take out the improvements in the current housing market.