Tuesday, April 05, 2005

Are They Buying or Not?

The day after the Wall Street Journal (subscription required) runs a story on the front page of the C-section about how European Investors are shying away from buying U.S. stocks, Irwin Stelzer notices that foreigners purchased $91.5 billion of U.S. stocks, bonds, and other assets in January 2005 (a 50% increase from January 2004). Actually, it's not clear to me whether Stelzer means the month of January or the entire year. But, no matter, his point is that foreigners are tripping over each other to purchase U.S. securities, suggesting that any further declines in the value of the dollar will be minimal and also perhaps that the yield on the 10-year treasury note is likely to remain paltry. Regarding this last point, however, it seems that as shorter-term debt yields more and more (thanks to Alan Greenspan), longer-term debt will have to follow sooner or later. It wouldn't make sense for longer-term debt to yield less than shorter term debt (the dreaded "inverted yield curve") unless investors were anticipating a nasty economic downturn, and I haven't heard any persuasive arguments for the likelihood of that (yet). The Journal piece notes that "foreign" investors may include American hedge funds based in the Carribean for tax purposes -- something that Stelzer doesn't mention and that could skew the data.


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