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The excess of US imports over exports continued to provide dollars to the rest of the world, which were invested in the US bond market.
The graph shows that foreign investments flowed into the market for US fixed income securities in Q1 2006, at a rate 25% greater than in 2005. (See Table F107, Rest of the World).
Although foreign central banks reduced flows into US treasuries and agencies after the high point of 2004, the shortfall has been more than covered by flows into bonds from foreign private sources.
Foreign Purchases of US Fixed Income Securities
The world likes US bonds
US corporate bonds, which until Q1 2006 consisted mainly of asset-backed securities and REITs, directed towards mortgage markets, continued to be favored by foreign investors.
In Q1 2006, non-financial corporations entered the bond market as issuers on a large scale, seeking financing for accelerated stock buyback programs. This unexpected new source of bond supply (mainly for non-productive purposes) helped in depressing bond prices in Q1 2006.
Neo-mercantilist impulses
Although there are worries about the Federal Reserve increasing interest rates throughout 2006, and perhaps into 2007, the driving force behind foreign purchases of US bonds is not so much related to interest rates as to worldwide neo-mercantilist impulses to increase exports over imports, accumulating dollar reserves.
These dollars find their way into the US bond market, exerting downward pressure on long-term interest rates , helping to neutralize contrary efforts by the Federal Reserve.
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