Motivation of Foreign Investors in US Bond Market Motivation: Foreign Investors in US Bond Market

Seeking Motives

Complex Motivation

Examination of motives of fund managers, of course, does not stop with their investment decisions.

Equity fund managers also exercise voting rights on the stocks they have in portfolio.

As a class, fund managers have enormous influence on the behavior of public corporations and so we must ask also, what motivates fund managers regarding how they vote stock held in portfolio?

This is a complicated matter that we will not go into here, since our purpose is only to indicate methods of finding motivation.

Foreign Investors in U.S. Bonds: Level-Two Analysis

In 2004, the financial press let it be known that:

Based on this evidence, it was widely believed, even in sophisticated financial circles, that bond prices would be down by year-end 2004, and long-bond interest rates would be higher.

The logic seemed compelling:

However, by year end, bond prices were up, not down.

Even Alan Greenspan, the Fed Chairman, was baffled.

The capital flow analyst who did his or her homework in level-two analysis of the motivation of foreign investors in the U.S. market would not have been similarly puzzled:

Even Chairman Greenspan was baffled.

Chairman Greenspan and most of the market missed the boat because:

In fact, misinterpretation of the "trade deficit" and its impact on the U.S. economy was widespread, even taking in such wizards of Wall Street as Warren Buffett.

The following articles in the Capital Flows weblog discuss the trade deficit and the motivation of foreign investors in bonds in greater detail:

Bond Prices ... Up or Down ... Which Is It?

Trade Deficits Have Depressed Bond Prices for Twenty Years ...

Warren Buffett Fears Foreign Ownership ...

The Other Side of the Dollar: The Brazilian Real ...

U.S. Trade Deficit Increases 10% in October 2004 ...

The Trade Deficit and Dollarization ...

Before proceeding, check your progress:



Capital Flow Analysis should include examining the actions of mutual fund managers with regards to:
Choice 1 Portfolio management.
Choice 2 Voting of portfolio shares.
Choice 3 Communicating with shareholders.
Choice 4 Marketing fund shares.
In 2004, foreign investors in U.S. bonds were primarily seeking:
Choice 2 A hedge against rising euros.
Choice 3 Cover for interest rate swaps.
Choice 4 Diversification out of equities.
Choice 1 A safe place to put trade dollars.
In 2004, dollars accumulated by the rest of the world from the U.S. trade deficit resulted in:
Choice 2 A fall in bond prices.
Choice 3 A fall in bond yields.
Choice 1 A fall in stock prices.
Choice 4 A fall in short-term interest rates.

Investment Tutorial: Capital Flow Analysis   Seeking Motivation of Investors and Issuers : continued >

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