A report from the Securities Industry Association indicates that U.S. investors bought a record amount of foreign securities in 1993, and bond market experts expect that trend to continue though 1994.
Against the backdrop of declining interest rates worldwide, capital flows between the United States and foreign markets in 1993 reached levels that only a few years ago would have been thought impossible, according to SIA economists Jeffrey M. Schaefer and David Strongin, director of international finance.
U.S. acquisitions of foreign securities totaled $128.6 billion, exceeding by almost $77 billion, or 151%, 1992's previous high of $51.2 billion. Meanwhile, foreign investors made purchases of U.S. securities nearing $112 billion, exceeding 1989's record $96.5 billion by 16%.
"Clearly, the U.S. appetite for foreign securities is growing faster than foreign demand for U.S. securities," Schaefer and Stringin said in a recent report on international capital flows.
"The substantial decline in bond yields in the United States sent investors scouring capital markets for higher bond as well as equity returns, producing unprecedented levels of activity in the process."
While U.S. fixed-income products showed returns of about 10.7%, all other major bond markets outperformed the United States in local currency terms. Slow economic growth in most developed markets and a benign inflation outlook suggested that there was further room on the downside for interest rates in many foreign markets.
For instance, U.S. net purchases of European Community bonds totaled $52.1 billion. The European Rate Mechanism crisis and the eventual widening of currency bands indicated that a decline in certain European interest rates was imminent, offering U.S. investors a chance for substantial capital pins in foreign bonds, the study by the Securities Industry Association said.
As the second quarter of 1994 gets underway, market analysts are still seeing capital flows out of the United States and expect this trend to continue through the year.
"Even with higher rates in the U,S., the movement toward higher returns and higher economic growth rates will continue," said Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc. in Chicago. "We'll still see large numbers of U.S. investors going into foreign markets."
Higher growth rates abroad will be a big selling point for foreign markets in the 1994 as economic activity in the United States moderates and economy's abroad continue to expand rapidly, Wesbury said. "In the U.S. we're looking at 3% growth rate right now while in countries like Singapore, Hong Kong and Mexico you could see growth rates of 5% to 6%," he said.
One portfolio manager said that in those countries where economic growth has slowed in recent months, such as in Europe, declining rates will attract U.S. investment. He said those investors looking to lock in a certain level of capital appreciation will want to put their money in the government bond markets were rates are poised to move lower.
For those investors looking to match the 1993 bond market returns, the potential for making quick profits in a declining rate environment will be difficult to resist," the money manager said.
A steady flow of moderate retail buying Tuesday helped the Treasury market shrug off strong news on the economy.
The 30-year bond ended Tuesday's session up more than 1/2 a point, to yield of 7.10%.
The Conference Board reported that its index of consumer confidence rose to 91.7 in April from 86.7 in March and 79.9 in February. The April reading took the market by surprise as it far exceeded economists' expectations for a flattish number.
Participants attributed the market's ability to stay above water after the numbers to scattered retail demand for Treasuries. Players on the buy side of the market are steadily perking up this week to the growing belief that the economy is not accelerating as investors feared.
"Real retail buying and a bit of short covering have kept us in positive territory," a trader said. "There is the sense that people are becoming more optimistic about owning bonds."
In futures, the June bond contract ended Up 5/32 at 106.21.
In the cash markets, the 5 1/8% two-year note was quoted late Tuesday up 2/32 at 99.07-99.08 to yield 5.53%. The 5 7/8% five-year note ended up 5/32 at 97.20-97.22 to yield 6.42%. The 5 7/8% 10-year note was up 8/32 at 93.07-93.11 to yield 6.81%, and the 6 1/4% 30-year bond was up 19/32 at 89.14-89.18 to yield 7.10%.
The three-month Treasury bill was up four basis points at 3.96%. The six-month bill was up one basis point at 4.39%, and the year bill was unchanged at 4.86%.
Moody's Investors Service Inc. senior economist John Lonski is predicting a recovery by speculative-grade bonds over the next six months, according to the latest issue of Moody's Speculative Grade Commentary, published this week.
Speculative-grade bond returns dipped 3.3% in March, their worst monthly drop since the bottom fell out of the junk bond market in 1990, Lonski said.
But he attributed most of those declines to the much stronger drop in both the Treasury bond and stock markets and concluded that "the recent market sell-off was overdone."
Lonski cited two key fundamentals that will continue to support junk bond returns: the outlook for continued U.S. economic growth and the strengthening credit quality of many junk bond companies.
The only major negative on the horizon for junk bond returns would be another tailspin in Treasury bonds, especially one that drives borrowing costs up to levels that sharply diminish business activity, Lonski said. He added that the recent junk bond market declines paled by comparison to the downdraft in Treasuries.
Lonski said that although, total returns on the Treasury's 30-year bond fell by 5.8% in the first quarter of this year, junk bond returns fell by only 1.4%.
In addition, he said "There is little reason to believe that the Fed-induced rise in long-term rates will immediately cut economic growth."
Lonski said it appears that Fed policy has been aimed at merely containing inflation and that "an aggressive tightening of monetary policy that could stall the U.S. economy has yet to materialize."
"Thus, excessive tightening and a corresponding loss of economic vigor are not in our most-likely-scenario forecast for the coming year," Lonski said.
He expects that speculative-grade companies will continue to post double-digit earnings growth, as most did during the first quarter of this year.
Junk bond returns have never shown sharp deterioration when earnings, have been that strong, Lonski said. Moreover, there has been no slump in expenditures by U.S. consumers for interest-sensitive items such as mortgage and auto sales.
In the primary market for corporate securities, a $100 million issue of Southtrust Corp. subordinated notes, due May 1,2004, was priced Tuesday as 7 5/8's at 99.592 to yield 7.684%, according to lead, manager Merrill Lynch & Co.
The noncallable issue was priced 85 basis points above comparable Treasuries. It is rated Baal by Moody's Investors Service Inc. and BBB-plus by Standard & Poor's Corp. !!!BEGIN TABLE Treasury Market Yields Prev. Prev. Tuesday Week Month3-Month Bill 3.96 3.96 3.566-Month Bill 4.39 4.39 3.941-Year Bill 4.86 4.86 4.382-Year Note 5.53 5.53 5.173-Year Note 5.89 5.89 5.555-Year Note 6.42 6.42 6.177-Year Note 6.49 6.49 6.3110-Year Note 6.81 6.81 6.7030-Year Bond 7.10 7.10 7.05
Source: Cantor, Fitzgerald/Tolerate !!!END TABLE