Bilal’s Macroscope: Foreigners Buying US Bonds on Selloffs
- By Bilal Hafeez and Viresh Kanabar
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Summary
- Foreign investors bought over $428bn of US bonds over the last six months (to November). Most of this demand was for US treasuries, which rose to $221bn.
- Turning to stocks, foreign investors sold $227bn of US stocks in 2022, but have since bought $10bn of US stocks to November. In contrast, US investors have bought just $2bn of foreign stocks.
Market Implications
- While foreign investors are no longer piling into US bonds at the record pace of 2020-2021, flows might be stabilising at elevated levels relative to pre-Covid at 1.6% of GDP.
- Last year, it took 10y yields exceeding 4.5% to entice foreign investors back into US treasuries.
- While flows into US equities were relatively tepid throughout 2023, recent ETF data suggest they are now picking up.
What Are Investors Buying?
The US Treasury recently updated its capital flow data to the end of November. We focus on private investor flows into the US as these better capture what profit-seeking investors are willing to buy.
Foreign Flows
Bonds:
Over the last six months, we find that on net, foreign investors bought US bonds to the tune of $428bn (1.6% of GDP). Purchases of US treasuries rose to around $211bn, driving much of the sum. Meanwhile, purchases of US corporate credit slowed to $122bn.
The increase in net purchases of USTs was the highest since August as higher yields reignited foreign investor demand. Meanwhile, foreign demand for US credit was the lowest since March 2023. Flows into US agencies remained steady at $95bn.
Stocks:
2022 was a difficult year for US stocks as foreign investors pulled out almost $227bn. This trend reversed in 2023, as we saw foreign investors reengage and purchase over $10bn of US stocks. Increased attractiveness from stronger growth and exposure to explosive end markets such as Generative-AI helped US equities outperform. All of this flow has come over the last six months, (particularly June) as net flows totalled around $53bn.
US Flows
Bonds:
Meanwhile, US investors have increased purchases of foreign bonds, after making large sales in 2022. Over the last six months, purchases totalled $38bn.
Stocks:
We see a similar pattern with US investor flows into foreign stocks. Despite strong US outperformance this year, US investors bought $48bn of foreign equities in the six months to November. This comes after selling around $45bn of foreign stocks in 2022.
ETFs:
We can also track ETF flows for a more real-time sense of investor activity. We expect the signal to work better for stocks than bonds due to the coverage of the largest ETFs.
We find flows into US bond ETFs stalled at the end of last year. Equity flows continued to see increases, coinciding with the late 2023, early 2024 rally.
(Chart 1: orange line = foreign purchases of US treasuries, blue line = foreign purchases into US bonds; Chart 2: orange line = foreign purchases of US agencies, blue line = foreign purchases into US credit; Chart 3: orange line = US purchase of foreign stocks, blue line = foreign purchases of US stocks; Chart 4: orange line = foreign into US bond ETFs, blue line = foreign purchases into US bonds; Chart 5: orange line = foreign flows into US equity ETFs, blue line = foreign purchases of US equities)
What We Learned
- Slowing flows into US credit may be a signal that the “all-in” yield is no longer attractive enough for foreign investors.
- The direction of both the USD and 10y UST yields have been inversely correlated to net flows into US equities. Therefore, a rise in the USD has been consistent with the net selling of US equities. One reason for this relationship is the rising and now positive correlation between US stocks and bonds over the last two years. Therefore, as yields have rose (alongside the dollar), foreign investors sold to sell high duration US stocks.
- The positive correlation between higher 10y UST yields and increased foreign flows into USTs broke down in April. Therefore, higher US treasury yields no longer attracted further inflows from abroad until they exceeded 4.5%.
(Chart 6: blue dots = 6m % change in US TWI vs. net purchases of US equities; Chart 7: orange line = US 10 year yield, blue line = foreign purchases of USTs)
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
Viresh Kanabar is an investment strategist with 8+ years of experience, notably contributing to portfolio construction and risk management at CCLA Investment Management, a £12 billion fund. Viresh was also a voting member of the Investment Committee and ran the private asset valuation process.