NEW YORK (Reuters) - Foreigners fled from short-term U.S. assets in September as a budget battle in Washington raised fears the government could default on some obligations, though demand for longer-term securities rose, U.S. Treasury data showed on Monday.
The budget standoff that was building in September forced a partial government shutdown that lasted for the first 16 days of October. That dented the safe-haven status of U.S. Treasury bills and pushed yields up sharply on bills maturing toward the end of that month.
Including short-dated assets such as bills, foreigners sold $106.8 billion in September, the biggest decline since February, 2009. August's outflow was also revised higher to $13.8 billion from an initially reported $2.9 billion.
Congress raised the debt ceiling a day before the Treasury said it would have run out of money to pay some obligations.
"You probably had a lot of people avoiding the short end of the U.S. yield curve at that point, which likely drove the big drop there," said Gennadiy Goldberg, U.S. strategist at TD Securities in New York.
But investors increased holdings of long-term securities in September by $25.5 billion as buying of Treasury notes and bonds as well as stocks and agency debt rose. That came after long-dated holdings fell by a revised $9.8 billion in August.
Goldberg credited the turnaround to the Fed's surprise decision not to start slowing its bond purchases in September, leaving most market participants expecting the central bank will not start winding down quantitative easing until early 2014.
"The non-taper decision probably led to the sizable reversal on long-term assets," he said. "We saw strong buying in pretty much everything across the board in the U.S."
Longer-dated Treasury holdings rose by $27.8 billion, more than reversing August's $10.8 billion decline. China, the largest U.S. foreign creditor, saw its holdings rise by $25.7 billion to $1.294 trillion, a four-month high.
Overall, though, it was private foreign investors who bought Treasuries. So-called "official" investors, which includes central banks, were net sellers in September, according to the Treasury data.
Foreign demand for debt backed by the biggest U.S. federal housing agencies rose by $14.7 billion during September, just below August's $16.8 billion inflow.
Overseas holdings of U.S. equities also rose by $12.5 billion, nearly reversing August's $16.9 billion decline.
Reporting by Steven C. Johnson; Editing by Chizu Nomiyama