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Foreign funds created by the record US trade deficit of $726.9 billion in 2005 were channeled mainly into the US bond market.

This went a long way towards keeping bond prices up, despite massive net corporate bond issues connected with asset-backed securities (mostly mortgage related) that also set impressive records: $462.9 billion.

Connectivity in capital flows

Foreign investors purchased (net) $214.1 billion in US Treasury securities and $351.1 billion in corporate bonds.

See: Federal Reserve national flow of funds account F 107.

It is interesting to note that foreign issuers sold (net) $137.5 billion in foreign corporate equities traded in the US (including ADRs), also a record level, despite higher costs with the Sarbanes-Oxley Act.

It seems that the trade deficit and foreign issuers were instrumental in maintaining price stability in the US capital market in 2005.

• In the bond markets, foreign investors bought up massive issues of mortgages and other debt instruments that threatened to sink bond prices.
• In the equity markets, new issues by foreign corporations helped neutralize record levels of stock buybacks by domestic corporations, keeping stock prices from soaring above already high levels.