U.S. Sept net inflows swell to near three-year peak

NEW YORK (Reuters) - Foreigners were big buyers of U.S. securities in September as credit seized up and global stocks tumbled, sparking the biggest U.S. capital inflow in nearly three years, the Treasury Department said on Tuesday.

Overseas investors in September snapped up a net of $143.4 billion in U.S. securities including short-term instruments such as Treasury bills, the biggest inflow since January 2006. It was above August's upwardly revised $21.4 billion inflow and enough to cover comfortably the month's $56.47 billion trade deficit.

Demand for long-maturity securities such as bonds, notes and equities also rose to $66.2 billion, compared with an upwardly revised $21 billion in August.

"The report was very strong and it shows that in financial market turmoil, U.S. Treasuries are still the investment of choice for investors," said Kathy Lien, director of currency research at GFT Forex in New York. "People want safety and there's nothing safer than Treasuries."

Indeed, Treasury debt was the most highly demanded U.S. asset, with international investors buying a net $20.7 billion, with $4.9 billion coming from foreign central banks.

Treasuries are considered among the safest investments and analysts said strong foreign demand for them during the darkest days of the credit and financial market crisis in September helped spark the U.S. dollar's recent rally.

China's holdings of U.S. Treasury debt rose to $585 billion from $541.4 billion in August, allowing it to surpass Japan as the largest holder of U.S. Treasuries.

Japan was second with $573.2 billion, down from $586 billion in August. Lien said the switch shows that Japanese investors were repatriating funds in September and helps explain why the yen began to rally sharply against the dollar and euro that month.

Foreigners bought a net $11.5 billion in stocks, the Treasury data showed. They also bought a net $6.2 billion in agencies, a rebound from a $22.2 billion outflow seen in August and a $40.1 billion outflow in July.

"The data supports current thinking that U.S. external financing will not be a problem in a global crisis," said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut.

Analysts said demand for debt of the government-sponsored enterprises Fannie Mae and Freddie Mac has softened a bit since the two were taken over by the government in September.

"We aren't surprised by the recent drop in U.S. agency holdings by foreigners given the GSE troubles, and that trend could continue in the coming months," said Win Thin, senior currency strategist at Brown Brothers Harriman in New York. "However, we are not seeing any wholesale dumping of dollar assets and are unlikely to see that in the coming months."

Foreigners continued to shun corporate debt, which saw a net outflow in September of nearly $7.6 billion.

(Reporting by Steven C. Johnson; Editing by Tom Hals)