('Despite U.S. backing, bonds issued by Fannie Mae and Freddie Mac have skeptics.')
By FLOYD NORRIS
Published: December 19, 2008
AS foreign investors pour cash into United States securities, particularly short-term Treasury bills, they are pulling it out of the higher-yielding bonds issued by the government supported-entities Fannie Mae and Freddie Mac.
Foreign purchases of government securitiesThe moves appear to indicate that even after the government bailout of the two agencies, there is some lingering doubt that the government would actually stand behind their debts if their situation grew much worse.
The Treasury Department reported this week that in October, overseas investors and governments were net sellers of $50 billion of agency securities, even though they yield significantly more than comparable Treasuries, which the investors bought at a record rate.
Over the summer, prices of agency securities fell as the financial crisis grew worse and some investors began to doubt whether the “implicit” government guarantee behind the agencies could be trusted. In July and August, foreigners were net sellers of $64 billion of such securities, an outflow unlike any previously seen.
That flight was one reason the government stepped in on Sept. 7 to effectively nationalize the agencies, although shares remain publicly traded. At first investors seemed reassured, but the confidence has now waned.
Despite the nationalization, the government has stopped short of putting its full faith and credit behind the bonds. The new data is the first indication that may have mattered to many overseas investors.
The accompanying chart at the top shows the monthly flows this year of foreign cash into Treasury securities and agency securities. More foreign money came into Treasuries in October — almost $91 billion — than in any previous month.
Most of the money — $56 billion in October — has gone into Treasury bills rather than into longer-dated bonds and notes. That flow helped to push down interest rates on bills to historically low levels, sometimes even a bit below zero, as investors sought complete safety.
Until the housing market began to show significant weakness in 2007, foreign flows into agency securities were running at almost $300 billion a year, and the flow stayed strong until the summer scare.
The other chart shows that over the 12 months through October, foreigners put just $65 billion into Fannie Mae and Freddie Mac, the lowest for any such period since 1998. Unless there was a revival of overseas interest in those securities in November and December, 2008 could become the first year to see net sales, at least since the data became available in the early 1990s.
Until the late 1990s there was relatively little overseas investment in agency securities. But as the Clinton-era budget surpluses reduced the supply of available Treasuries, foreign investors discovered these investments, which seemed to be close substitutes. Even after large budget deficits resumed early this decade, the overseas demand for agencies continued to grow until questions about their solvency began to be heard.
Now, virtually all the foreign money is going into Treasuries — at a rate of more than half a trillion dollars a year.
Floyd Norris comments on finance and economics in his blog at nytimes.com/norris.
http://www.nytimes.com/2008/12/20/business/worldbusiness/20charts.html?ref=business
