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.