The latest data for foreign purchases of U.S. securities became available last week and at $18.67 billion, August foreign purchases of corporate debt were actually down some $7.7 billion on the previous month and, in fact, were the lowest level seen in the last six months. Other fixed-income asset classes also experienced a reduced amount of foreign demand with Treasury purchases falling by 44% month-over-month to $25.2 billion and agency purchases at $9.8 billion, down by 17% versus July. The opposite was true of the equity market however. August foreign purchases totaled $11.6 billion, a sharp turnaround from the $7.8 billion of net selling that was seen in July. August equity demand was the strongest level seen since December 2001.
Despite the fall in the absolute numbers it would not be accurate to characterize the corporate data as evidencing much weakness given the abnormally low primary market issuance levels seen in August. Investment-grade supply in August was just $11.6 billion and even though this was supplemented by $8 billion worth of high-yield deals overall volumes were exceptionally light. Therefore, even the reduced level of foreign purchases equated to 95% of the month's primary supply, highlighting the degree to which the market continues to be bolstered by the flow of bonds to offshore accounts. Actual volumes continue to run at the upper band of our forecasts as, to date offshore investors have shown great immunity to the degree of spread compression seen so far in 2003. We are now just over one year into the corporate bond market rally and over that time, non-US accounts have bought some $227 billion of corporate debt with no let up in the pace to date. Year-to-end August volumes are $182 billion, which already equals 2002's full-year totals and it is likely that 2003 will eclipse 2001 and record the highest annual level of purchases on record. Volume will be three times that seen just five years ago, highlighting how quickly the globalization of the market is changing the dynamics of the investor base.
The driving force behind this trend has been Europe. In the first eight months of 2003 the region's purchases have already exceeded 2002 totals by 40%. U.K. purchases have not grown as rapidly as those in Europe but 2003 year-to-date volume is 7% up on the comparable period in 2002. In the Asian region, demand appears to be more opportunistic and less about long-term shifts in investment trends. Japanese demand has always been minimal compared to Europe and the U.K. A peak of $16 billion was recorded in 2000 but volumes dropped sharply the following year as the defaults and downgrades rose, and annual purchases have been erratic since. In 2003 so far, the Japanese have bought just $6 billion worth of corporate bonds. The story in non-Japan Asia is somewhat more robust. Year-to-date purchases are $13 billion versus $16 billion for all of 2002 but both of these numbers are well below the peak of demand seen in 2001 when $22 billion worth of bonds found a home in the region. The shift into corporates that was occurring at that time was interpreted as being representative of an increase in risk appetite as well as a rejection of the prevailing low yield levels available on Japanese government bonds. The pick up in yield has certainly been eroded since then but it appears that the drop in demand has far more to do with the credit chasm that opened in 2001/2002 and the resultant increase in defaults and downgrades that has curbed the appetite of the ratings-sensitive Asian investors. Although the corporate sector has delivered a strong improvement in credit quality via ratings stability in the latest year, it is clear that this has but a lagging impact on demand in the region and with spreads having compressed so far already, the potential for much increased demand from Asian is likely to be limited in the near term. As U.S. issuers increasingly rely on non-U.S. investors to fund their borrowings, it is our neighbors across the pond that are stepping up to the plate.