NEW YORK (Reuters) - Foreigners were net sellers of U.S. assets in May for the first time in 11 months as the prospect of persistently low U.S. interest rates spurred a hunt for higher returns elsewhere, Treasury data showed on Monday.
Concern about the U.S. fiscal deficit, which had started to creep into investors’ thinking and some politicians’ speeches by May, may have weakened foreign demand, too, analysts said.
Selling was heaviest in short-term assets such as bills and deposits, contributing to an overall net outflow of $67.5 billion. That was the first net outflow since June 2010, and it reversed a $66.6 billion inflow recorded in April 2011.
The U.S. dollar pared losses against the euro after the data while most Treasury debt prices cut gains.
“This is not good for the dollar, and it seems clear to me that the Federal Reserve’s strategy of ultra-accommodative monetary policy is prompting investors to shift their savings out of the U.S.,” said BNY Mellon strategist Michael Woolfolk.
Foreigners also cut purchases of long-term U.S. securities in May by $7 billion to $23.6 billion, nearly halving their purchases of U.S. equities. They were net sellers of securities issued by U.S. mortgage financing agencies, including Fannie Mae and Freddie Mac.
The “one bright spot,” Woolfolk said, was continued demand for Treasury notes and bonds, with overseas buying climbing by $14.6 billion. China, the largest foreign U.S. creditor, held $1.160 trillion in May, from $1.153 trillion the prior month.
But he said that is largely the result of recycled petro-dollars from oil exporters and buying from Asian central banks such as China’s that buy dollar-denominated assets to control the value of the their own currencies.
Some analysts said they expect demand for Treasuries and other U.S. assets to have continued to wane in June and July as debate over raising the U.S. borrowing limit grew more shrill.
The Treasury has said it could default on its obligations if the limit is not raised by August 2 and ratings agencies have threatened to cut the United States’ prized AAA credit rating if that happens.
Separate data from Statistics Canada showed foreigners added C$15.44 billion ($16.08 billion) in Canadian securities to their portfolios in May, the highest total so far in 2011.
“With the focus on the debt crisis, the question is if investors have any reason to buy U.S. debt securities,” said Kathy Lien, director of currency research at GFT Forex in New York. The data indicates that “even in May, investors were shunning U.S. dollars.”
Editing by Chizu Nomiyama