Foreign funds created by the record U.S. trade deficit of $726.9 billion in 2005 were channeled mainly into the U.S. bond market. This went a long way towards keeping bond prices up, despite massive net corporate bond issues connected with asset-backed securities (mostly mortgage related) that also set impressive records: $462.9 billion.

Foreign investors purchased (net) $214.1 billion in U.S. Treasury securities and $351.1 billion in corporate bonds. (See: Federal Reserve national flow of funds account F107.)

It is interesting to note that foreign issuers sold (net) $137.5 billion in foreign corporate equities traded in the U.S. (including ADRs), also a record level, despite higher costs with the Sarbanes-Oxley Act.

It seems that the trade deficit and foreign issuers were instrumental in maintaining price stability in the U.S. capital market in 2005.

  • In the bond markets, foreign investors bought up massive issues of mortgages and other debt instruments that threatened to sink bond prices.

  • In the equity markets, new issues by foreign corporations helped neutralize record levels of stock buybacks by domestic corporations, keeping stock prices from soaring above already high levels.


In 2005, net issues of agency and GSE-backed securities were only 7.8% of levels of 2001, when Fannie Mae was in her heyday, aggressively flogging mortgages to the masses.

In 2005, net issues of agencies were only $50.7 billion, indicating that this sector had become far less important in the fixed income market than at any time in the last decade. (See: Federal Reserve national flow of funds account F210.)

However, Fannie Mae and her kin are not dead and are coming back.

In Q4 2005, net issues of agency securities rose to $377.3 billion (annual rate).

This was still only 58.7% of the rate of net issues in 2001, but is a definite proof of life.

Much of the mortgage securitization business that was handled by the agencies went to issuers of asset-backed securities, controlled by commercial banks, after the government put restrictions on Fannie Mae, encouraging CEO Franklin Raines to step down.

As the agencies get their capitalization and accounting in order, competition in this segment of the fixed income market can be expected to heat up.


Total mortgage borrowing fell 6.6% during Q4 2005, compared to the previous quarter, according to Federal Reserve flow of funds table F217.

Mortgage borrowing by households fell even more, down 11.7% compared to Q3 2005.

Two-thirds of mortgage financing came from agencies (e.g., Fannie Mae) and issuers of asset-backed securities.

The rapid withdrawal of borrowers from the home mortgage market, as interest rates rose in Q4 2005, suggests that much of the borrowing over the last year or so was probably opportunistic, stimulated by low interest rates and aggressive marketing (e.g.,


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