Assessing the Potential for Further Foreign Demand for U.S. Assets: Has Financing U.S. Current Account Deficits Made Foreign Investors Overweight in U.S. Securities?

57 Pages Posted: 1 Nov 2008

See all articles by Carol C. Bertaut

Carol C. Bertaut

Board of Governors of the Federal Reserve System

Date Written: October 30, 2008

Abstract

Since 2001, foreign investors have acquired roughly $5 trillion in U.S. securities - more than doubling their holdings of U.S. equities and bonds - as both official and private inflows have financed record U.S. current account deficits. Although the rapid growth of foreign holdings of U.S. securities raises concerns that foreign investors may have become too heavily weighted in U.S. assets, foreign investors have not in fact materially changed the relative allocations between U.S. and other foreign securities in their portfolios in recent years. Based on data from the most recent comprehensive surveys of foreign portfolio investment, the 2006 IMF Coordinated Portfolio Investment Surveys (CPIS), most foreign investors remain relatively more underweight in both U.S. equities and bonds than they do in foreign securities in general. Although the underweight position suggests that there remains potential for foreign investors to continue to acquire U.S. securities, econometric evidence indicates that the underweight position itself reflects a preference by foreign investors for securities of countries with which they have strong economic or cultural ties, consistent with recent research that suggests "location" or "information" preferences in both domestic and international portfolios. As securities markets abroad continue to deepen, such factors are likely to continue to attract investment from "nearby" markets, especially from European investors.

Keywords: Equities, bonds, home bias, international portfolio allocation

JEL Classification: F3, G15, G11

Suggested Citation

Bertaut, Carol C., Assessing the Potential for Further Foreign Demand for U.S. Assets: Has Financing U.S. Current Account Deficits Made Foreign Investors Overweight in U.S. Securities? (October 30, 2008). FRB International Finance Discussion Paper No. 950. Available at SSRN: https://ssrn.com/abstract=1292741 or http://dx.doi.org/10.2139/ssrn.1292741

Carol C. Bertaut (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States

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