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Foreign central banks were net sellers of US securities in March for the first time since August, 2003.
This sharp fall in foreign bond purchases is mostly the result of a mysterious decision by oil-rich Norway to dump half its holdings of US Treasury bonds on the market.
The slack was taken up by non-central bank purchasers: Carribean-based financial institutions dealing in hedge funds made purchases that offset Norway's central bank selling, according to a report in the Wall Street Journal.
Hedge funds are financial instruments that spread the risk in purchasing corporate bonds. As we wrote about last week, one form of hedge funds so-called "collateralized-debt obligations," or CDOs, have fallen sharply in price, thanks to S&P's rating change of Ford and GM bonds to "junk status."
This was only one of several signs of a general weakening in the corporate bond market. This weakening has led financial institutions to favor U.S. Treasury bonds over corporate bonds. Thus, when Norway's central bank dumped its US Treasury bonds on the market, an opportunity was available to private financial firms to switch from corporate bonds to Treasury bonds, and that appears to be what's happening.
Norway's move might be an isolated incident, or it might be part of a larger trend. Foreign central banks, especially in Asia, have been supporting America's massive public debt by making equally massive purchases of Treasury bonds. If foreign central bankers become disenchanted with their huge holdings of Treasury bonds, then private hedge fund dealers might take up the slack, but this would make the global financial markets less stable.
None of this would really matter much if it weren't for the fact
that, as I've discussed many, many times, we're in a stock market
bubble with stocks overpriced by about 100%, according to standard
price/earning ratio measures, and the American balance of payments
deficit (current accounts deficit) continues to grow exponentially,
as it has since 1945. It's only a matter of time before the bubble
bursts, launching us into a new 1930s style Great Depression.
(17-May-05)
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