Learning to Love Stocks and Bonds

By Gordon Bock

While foreigners have poured billions of dollars into U.S. buildings, banks and blue-chip companies, it is the vast sums they are pumping into America's stock and bond markets that have the greatest impact on its economy. All told, foreigners last year held more than $500 billion worth of U.S. Treasury and other government securities, corporate bonds and shares in publicly traded companies. (They also owned $449 billion deposited in accounts in American banks.) U.S. holdings of foreign stocks and bonds amounted to $269 billion, but foreign holdings are rising faster. The fact is that outsiders are supplying the funds that enable the U.S. to continue piling up its extravagant national debt.

American financial markets offer both the stability and variety of opportunity that prudent investors crave. Wall Street analysts give foreign investors credit for a major helping hand in the five-year bull market, and well they should. Via the computerized linkages that now tie together the world's financial markets, overseas investors are gobbling up U.S. stocks at a $39 billion annual rate this year, adding to their previous holdings of $167 billion. In the first three months of 1987, the Japanese bought $3.5 billion in U.S. stocks, while the British spent $2.4 Says Byron Wien, domestic portfolio strategist for the investment firm Stanley: "The Japanese are buying at four times the rate of last year."

Foreigners are even more enamored of bonds. They had amassed $142 billion in corporate and non-Treasury government bonds (including mortgage-backed securities) by the beginning of this year. But non-American investors are fonder still of securities sold by the Treasury Department. Foreigners own 16% of the $1.7 trillion in outstanding publicly held U.S. Treasury debt instruments. At the latest sale of U.S. Treasury long-term bonds in August, Japanese buyers snapped up more than 30% of the 10-to-30-year offerings, boosting their holdings in Treasury securities to $65 billion or more.

There are limits to how far foreign investors can back away from American investment opportunities these days. The U.S. has become a megadebtor like Brazil and Mexico: American obligations are so great that creditors must help extend U.S. indebtedness to avoid damage to their own economies and investments. With Japanese domestic savings estimated at $1 billion or so a day, there is simply no other non-Japanese financial market large enough to absorb the sums available for investment. Besides, the current yield of long- term Treasury bonds (more than 9%) is roughly 3 percentage points higher than that paid by Japanese bonds.

The bedeviling relationship of foreign creditors with America the Debtor has shown up strongly in recent weeks. Foreign governments have intervened repeatedly to prevent the U.S. dollar from sinking even faster than it has so far. A weaker dollar would make American exports cheaper and imports more expensive -- and that would make the U.S. better able to repay its debts. But America's major creditors, who are also its major trading partners, are not wild about a further rapid slide in the dollar's value: such a precipitate decline would erode the trade surpluses that made them creditors in the first place. They are better served if the U.S. continues to consume foreign goods while increasing its foreign debt, albeit at a reduced rate. Thus the potential for further uncertainty is created, in which the U.S. must walk a tightrope between too much fiscal responsibility and not enough.

With reporting by Barry Hillenbrand/Tokyo and Raji Samghabadi/New York