Boston, Feb
15: According to the Treasury International Capital (TIC) report foreigners     
made a $61.3 bln net purchase in December, down from a revised $89.3 bln in     
November (prev. $81.0 bln).  There was a sharp drop in foreign appetite for     
Treasuries, which was already suggested by Fed custody holding data.  Foreign   
net purchases of Treasury securities totaled $8.3 bln in December vs. $32.8 bln
in November.  There was continued strength in agency investment though it was   
slightly slower on the month. Corporate bond purchases accelerated to $40.9 bln
from $25.6 bln in November.  This was the strongest net investment into the     
sector since September ($43.5 bln).                                             
   While net investment slowed in December, it was within the range seen over   
the past two years and well above the $45.0 bln net investment that was rumored
prior to the release.  Moreover, last year foreigners purchased a net $821.8 bln
in U.S. securities.  Compare that to a trade deficit of $617.7 bln and the U.S.
has few problems funding its current account.                                   
    Treasury net investment included a net $7.0 bln purchase by foreign official
institutions in December, down from $21.0 bln in November.  Private foreign     
investors bought a net $1.5 bln in December, compared with net purchases       
of $11.5 bln in November. International and regional organizations sold a net   
$174 mln in December vs. a net purchase of $287 mln November.                   
    Foreign official holdings totaled $1.173 trn in December down from $1.1768 
trn in November.  The fall was a result of slower investment in Treasury bills,
which fell to $244.6 bln from $255.4 bln.  Investment in Treasury coupons       
totaled $928.4 bln, up $7 bln.  Overall foreigners hold just over 49% of all   
marketable Treasury debt outstanding.  Foreign central bank holdings of notes   
and bonds account for about 34.4% of all Treasuries outstanding so it"s not hard
to see why the market remains preoccupied with foreign sponsorship.             
    In the 12 months ending in December, foreign investors made a $356.7 bln net
purchase of Treasuries, down from $376.8 bln in November.  Foreign official     
accounts made a $203.1 bln net purchase of Treasuries in 2004 compared with a   
total net purchase of Treasuries of $113.5 bln in 2003.  At the same time, total
marketable Treasuries outstanding increased by $368.7 bln with note and bonds   
higher by $226.6 bln. The degree of sponsorship by foreign investors is one     
reason why rates have stayed low even as the budget deficit has soared.         
    Of the major foreign holders of Treasuries, China and the UK increased their
holdings substantially while Japan trimmed its holdings by just over $3 bln.   
China"s holdings rose by $2.7 bln to $193.8 bln.  The UK increased its holdings
by $11.2 bln following a large $17 bln purchase in November.  Its investment   
in Treasuries is at record levels.  Japan"s holdings fell by $3.1 bln to $711.8
bln.  It holds just over 18% of all marketable Treasuries outstanding. Its     
holdings peaked at $721.3 bln in August or 18.8%.                               
    Holdings of Treasuries by Caribbean Banking Centers -- a fair proxy for     
hedge funds -- fell by $8 bln in December to $69.4 bln, their lowest level     
since April 2004 ($60.8 bln).                                                   
     Foreigners made a $26.6 bln purchase of agency securities, down slightly   
from $27.8 bln in November.  Fed custody holdings suggest further agency       
investment by foreign central banks searching for yield and a pseudo-governemnt
credit.                                                                         
    In December there was a $40.8 bln purchase of corporate bonds, compared with
a $25.6 bln net purchase in November.  This category was the only sector to see
a rise in net investment.  As a matter of interest, new corporate issuance     
totaled $33.1 bln during the month according to IFR"s records.                 
    December saw a $7.1 bln net investment in US equities following a $14.4 bln
net purchase in November.  At the same time US investors sold a net $15.4 bln in
foreign stocks and a $6.2 bln in foreign bonds.                                 
    The December report showed an increased reliance on private flows which is a
positive sign.  Moreover, the slowing in investment by foreign central banks is
somewhat of a seasonal issue.  As a matter of comparison, in December 2003     
foreign central bank net investment into Treasuries rose by $8.7 bln.           
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