By Steven C. Johnson
NEW YORK (Reuters) - Foreigners ditched U.S. equities and cut mortgage-backed debt in October in favor of government bonds, U.S. Treasury data showed on Monday, as market and global economic uncertainty increased.
Overall, overseas investors bought $1.3 billion in long-term U.S. securities, the fewest in at least three years, with much of the selling coming at the expense of stocks and bonds issued or guaranteed by the biggest U.S. mortgage financing agencies.
The shift appeared to reverse the heavy purchases of stocks and mortgage-related bonds seen in September after the Federal Reserve announced plans to start buying $40 billion of mortgage debt per month to cut long-term interest rates and stoke growth.
"It looks like we're seeing an unwind of the post-QE 3 trade," said TD Securities U.S. strategist Gennadiy Goldberg, referring to the Fed's third round of monetary easing, known as quantitative easing, or QE.
When including short-term assets such as bills, Treasury data showed foreigners were net sellers of U.S. assets to the tune of $56.7 billion, the largest outflow since July 2011.
Some of the shift may reflect demand for higher-yielding assets abroad, analysts said. By suppressing rates and flooding the system with dollars, the Fed's several asset-buying programs have weighed on the greenback and dulled the appeal of dollar-denominated assets.
"The weakness in net flows....is testimony to how policymakers have dampened demand for the U.S. dollar" and prompted U.S. investors to look for higher-yielding assets abroad, said Alan Ruskin, head of G10 foreign exchange strategy at Deutsche Bank.
However, Goldberg noted that demand for low-yield Treasury debt recovered, with foreigners buying $15.8 billion in October. They had sold $17.3 billion the prior month, when impending Fed action burnished the appeal of stocks and mortgages.
"Overall, it looks weak, but look below the headline numbers and you'll see there's really no lack of demand for U.S. assets," he said. "I doubt that will change into next year. There is still tons of uncertainty and that increases demand for safe-haven Treasuries. People need a place to stash their cash."
China, the largest foreign U.S. creditor, increased its Treasury holdings by $7.9 billion to $1.162 trillion. Japan, the second largest foreign holder, bought $5.2 billion in October, bringing its total to $1.135 trillion.
Investors in October were on edge about a forthcoming U.S. presidential election that looked like it would be a close-run affair; President Barack Obama ultimately prevailed in November.
But the uncertainty has increased since then, with markets now worried about whether Obama and Republicans in Congress can forge a deal to avoid the so-called "fiscal cliff" -- some $600 billion in automatic spending cuts and tax hikes that economists fear will plunge the economy back into recession if they take effect as planned in January.
In October, foreigners bought a net $598 million of U.S. stocks, well below the $23.8 billion inflow in September. They reduced purchases of agency mortgage debt to $8.4 billion from $17.8 billion in September.
(Editing by Chizu Nomiyama)