By Steven C. Johnson
NEW YORK, March 15 Foreigners boosted purchases of U.S. government bonds in January and cut back on U.S. equities after two months of strong inflows, U.S. Treasury data showed on Friday.
Demand for Treasuries was driven entirely by official buyers, including central banks, who snapped up $53.1 billion. That was the largest inflow in at least three years.
Because private investors sold Treasuries in January, the sector recorded a net inflow of $32.3 billion, the highest since last August.
"It's not uncommon to see a difference between official and private buying, but it is uncommon to see a difference this big," said Tom Simons, an economist at Jefferies & Co.
The surge in official demand suggests central banks intervened heavily in January to maintain their exchange rates as investors poured money into their equity markets, said Greg Anderson, a currency strategist at Citigroup.
China, the largest foreign U.S. creditor, boosted Treasury holdings by $44.1 billion to $1.265 trillion.
"Equities all around were buoyant in January, and in the first half, money was flowing into emerging market equities," he said. "For central banks, that's the money they want to mop up."
Data from the Investment Company Institute showed $37.9 billion was invested in global equity mutual funds in January, the most in nearly 13 years and more than reversing December's $30.7 billion outflow.
The surge into overseas equities may have accounted for the falloff in foreign demand for U.S. stocks, which saw an inflow of $5.7 billion in January compared with $25.9 billion in December, Anderson said.
But U.S. stocks began to outpace those in emerging markets in February and March, with the Dow Jones Industrial Average hitting a record high earlier this month.
"With what we know about the money flowing into developed market equities lately, I'd expect (foreign demand for) U.S. stocks to be much higher" in the Treasury's February data, Anderson said.
Overseas purchases of all long-term U.S. securities slipped to $25.7 billion in January compared with $64.2 billion the previous month.
Demand for U.S. stocks and improvements in U.S. economic data have helped the dollar notch multi-year peaks against the Japanese yen and British pound and its highest in three months against the euro.
"In general, the appetite for risk was improving at the turn of the year, particularly since the market had got past the fiscal cliff issues," Simons said.
Congress reached a deal on New Year's Day that avoided triggering automatic tax increases for nearly all earners.
Foreign inflows into corporate bonds rose by $3 billion to $5.6 billion in January. Purchases of U.S. agency debt slipped to $4.6 billion from $18.1 billion in December.
Including short-dated assets such as bills, overseas demand totaled $110.9 billion in January, compared with a downwardly revised $22.2 billion the prior month.