US Trade Deficit 2005

Foreign investors help stabilize US markets

By John Schroy, on March 15th, 2006 | Skip to comments

Reading time: 2 – 2 minutes

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.