The U.S. posted a record cross-border investment outflow in June as China and Japan reduced their holdings of Treasuries and private investors abroad sold bonds and notes.

The total net outflow of long-term U.S. securities and short-term funds such as bank transfers was $153.5 billion, after an inflow of $33.1 billion the previous month, the Treasury Department said in a report today. The June figure, and $40.8 billion in net selling of Treasury bonds and notes by private investors in June, were the largest on record, the Treasury said.

“Right at the beginning of June, you had a very strong sell-off of Treasuries and that’s what frightened a lot of private investors,” Gennadiy Goldberg, U.S. strategist at TD Securities USA LLC in New York, said by phone. “As yields stayed lower in subsequent months, some of the investors probably resumed their buying.”

China’s holdings of U.S. Treasuries declined by $2.5 billion to $1.27 trillion, while Japanese holdings dropped $600 million to $1.22 trillion, according to a Treasury report today.

China and Japan’s combined share of total foreign holdings of Treasuries has declined since 2004. It dropped to 41.4 percent in June from 50.9 percent in August 2004, according to data compiled by Bloomberg.

What could also be concerning is at this point is the U.S. Treasury isn't exactly certain just how much U.S. China actually holds. Part of the problem is that some of the data is based on transactions, but doesn’t take into account trades that some institutions do on behalf of other countries. The Major Foreign Holders table is supposed to take into account such proxy trades, reassigning transactions to the appropriate nations.

But not everybody’s abides by Treasury’s requests.

The lack of clarity is one of the reasons U.S. Treasury Secretary Jacob Lew counted a promise by Beijing to be more transparent about its foreign-exchange operations a small triumph at the high-level U.S.-China talks last month.

Beijng left itself a loophole, however. It didn’t offer a timeline.

Belgian Holdings

Meanwhile, holdings in Belgium climbed $1.7 billion last month to $364.1 billion, the report showed. As home to Euroclear Bank SA, a provider of securities settlements for foreign lenders, Belgium probably serves as a custodial holder for many countries, including China, said Jeffrey Young, an interest-rate strategist at Nomura Holdings Inc. in New York.

Private investors and government holders combined were net sellers of $20.8 billion in Treasury notes and bonds in June, the biggest monthly net sales in a year, according to the report.

Treasuries declined in June amid improving economic data, and as reports released that month, from unit labor costs to consumer prices, indicated inflation pressures beginning to build within the economy. Labor Department data released June 17 showed the consumer price index for May unexpectedly rose to 2.1 percent, the highest since October 2012.

Treasuries were bolstered and yields began to decline after Federal Reserve Chair Janet Yellen described the inflation data as “noisy” and stressed the economy’s need for continued accommodation at her June 18 press conference. That followed a meeting at which policy makers held the benchmark interest rate near zero, as they have since December 2008.

Coincidentally, Belgium’s ballooning purchases roughly match the period when the U.S. Treasury says Beijing was buying major volumes of foreign exchange, including U.S. debt, to keep a lid on the value of its own currency and ensure its exports remained competitive in the global market.

With the Fed's plan to begin raising rates in 2015, big money flows will certainly be interesting to monitor in the months ahead......and see if more volatility lies ahead in equities as a result.

Courtesy of Bloomberg and WSJ

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