By Steven C. Johnson
NEW YORK, Nov 16 (Reuters) - Foreigners sold U.S. government bonds in September for the first time in nine months and bought stocks and mortgage debt as the Federal Reserve began a new round of monetary easing, U.S. Treasury data showed on Friday.
Overseas investors reduced Treasury holdings by $17.3 billion in September, the first outflow from the government bond market since December of 2011.
The move came during a month when the Fed said it planned to start buying $40 billion in mortgage-backed debt each month to lower long-term interest rates and boost economic growth.
Prior rounds of Fed asset purchases that have flooded the financial system with cheap money have helped to boost high-yielding, high-risk assets such as stocks.
“This is the post-QE3 trade,” said Gennadiy Goldberg, U.S. strategist at TD Securities. “That’s why we saw a shift into agency bonds and strong demand for equities.”
Foreigners bought a net $17.8 billion in bonds issued or guaranteed by the biggest U.S. mortgage financing agencies, down slightly from $18.6 billion the prior month. They also bought $23.8 billion in U.S. stocks, the biggest inflow in at least three years, after buying just $6.2 billion in August.
Much of the money was diverted from the Treasury market, which had been attracting an average inflow of around $43 billion per month through August.
That pushed overall foreign purchases of U.S. long-term assets down to $3.3 billion in September, the lowest total since July of 2011, from $90.3 billion in August.
Goldberg said there was no reason to think foreigners had soured on Treasuries for good, noting that September marked only the second monthly foreign outflow in the last three years.
“There is still plenty of foreign demand for U.S. securities,” he said. “This time, it was more a matter of what they were buying rather than if they were buying.”
Private investors were the main Treasury sellers, unloading a record $18.3 billion in September, the U.S. Treasury said.
Demand eased among official investors, which includes foreign central banks, but remained positive. China, the largest foreign U.S. creditor, increased its Treasury holdings by $300 million to $1.156 trillion. Japan bought $7.9 billion in September, leaving its Treasury holdings at $1.131 trillion.
Including short-dated assets such as bills, foreigners added $4.7 billion in September, the smallest inflow in nearly two years. In August, foreigners bought a downwardly revised $63.5 billion.