Fisher Investments Editorial Staff
Deficits, US Economy

America, Still Popular

By, 05/18/2010
 

Story Highlights:

  • A US Treasury report showed global net buying of US equities, notes, and bonds totaled $140.5 billion in March, sharply up from $47.1 billion in February.
  • China—a well-documented critic of US economic policy—added to its position as the foremost US creditor, with a net purchase of $17.7 billion.
  • Contrary to speculation foreigners will cease buying US debt, actions show investors still deem long-term US assets desirable, easing concerns about servicing our debt.
  • Increased investment in US companies enhances firms' access to capital and could bode well for future business growth.

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Sometimes, it's easy to imagine the world as a high school, replete with the jostling for popularity, snide remarks, cliques, and frenemies. If so, it'd seem the US has long been comfortably ruling the halls for decades. Recently, however, upstarts like China, Russia, and Brazil have called into question America's fiscal situation and the dollar as the world's reserve currency. But a new US Treasury report shows it takes more than badmouthing to strip US assets of their popularity. 

Though some fear the large US deficit means we're headed down a Greece-y path, global net buying of US equities, notes, and bonds totaled $140.5 billion in March, up sharply from $47.1 billion in February. The unexpected surge can likely be attributed to increased confidence in a sustained US economic recovery—bolstered by strongly positive data—amid heightened uncertainty in Europe.  

China—the US's foremost foreign creditor and vocal critic of its economic policies—added to its Treasury holdings with a net purchase of $17.7 billion (its first net increase in five months) to total $895.2 billion. (Note: Some fret over China being the largest holder of US debt, but it turns out China is also the largest importer of US food exports. Do the Chinese fear we control too much of their food supply? Likely not.) Japan, the second largest holder of Treasuries, and the UK also increased their sizeable portfolio holdings of US debt.  

Additionally, net foreign purchases of US corporate bonds were $16.0 billion, the first increase since May 2009, following net sales of $12 billion in February. Demand for US agency debt also posted large gains. 

So contrary to speculation foreigners will abandon US debt, leaving us dateless at the prom, actions show investors still deem long-term US assets desirable. Capital inflows into government coffers should ease concerns about financing our deficit and rolling over debt, while increased investment in US companies' debt and equity enhances firms' access to capital and could bode well for future business growth. 

Despite fears of a Greek contagion, there are signs most of the world is recovering from recession nicely. Troubled spots will exist even in the best of economic times, but there's little reason to think a handful of relatively small economies can derail the more powerful global economic engine. As the world economy continues to grow, even these trouble spots should benefit. For now, concerns about PIIGS or other small pockets of the world might persist, perhaps adding to general market volatility. But continued strong demand for US dollar assets shows the so-called contagion remains far from our shores, and when it comes to investment liquidity and safety, the US is undeniably still the BMOC (big man on campus).

 

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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