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US net overall capital inflows at $60.9 bln in Dec

U.S. Treasury data released on Tuesday showed net overall capital inflows into the United States rose to $60.9 billion in December, up from a $30.7 billion inflow the prior month. That was enough to cover the December trade deficit of $40.18 billion.

Net inflows into long-term securities totaled $63.3 billion, down from November’s $126.4 billion.

Foreigners continued to shun corporate bonds and cut purchases of U.S. agency debt. But net inflows into U.S. equities shot up to $20.1 billion in December from $9.6 billion in November. U.S. investors also increased purchases of foreign securities, suggesting increased appetite for risk.

“I see this as a positive report. Foreigners continued to buy U.S. Treasuries and increased their appetite for U.S. equities going into the end of the year,” said Michael Woolfolk, currency strategist at BNY Mellon in New York.

Net outflows from Treasury bills hit a record $53 billion, though Woolfolk said that may reflect more confidence in the U.S. economy as foreigners cut safe-haven purchases of bills and shifted into longer-dated securities.

Also, U.S. Treasury officials said earlier this month that they ended December “with an avalanche of cash,” primarily from from repayment of Troubled Asset Relief Program funds by banks such as Citigroup , Bank of America and Wells Fargo & Co. .

Much of this was used to pay down Treasury bills as the government tried to stay under the debt limit and shifted more of its borrowing to longer-dated coupons.

China treasury holdings fall

China also likely contributed to the decline in bill pruchases. The country’s overall Treasury holdings fell to $755.4 billion in December from $789.6 billion in November, dropping it behind Japan as the largest holder of U.S. Treasury debt. Japan’s holdings hit $768.8 billion from $757.3 billion.

Alan Ruskin, chief international strategist at RBS Securities, said China was a net seller of all Treasuries for a fifth straight month in December to the tune of $34 billion.

That, he said, is “a long enough period to hint strongly at a trend,” though he adds that strong Treasury buying was seen from the United Kingdom, Luxembourg, Japan and Hong Kong.

Ruskin said China built up its Treasury bill holdings dramatically during the worst of the financial crisis and may have room to cut short-dated U.S. holdings even further.

China is one of the biggest U.S. creditors but has complained over the last year about U.S. policies and worried about the security of its dollar-denominated assets.

Some analysts fear a waning appetite for U.S. debt could push up Treasury yields and weaken a fragile U.S. recovery.

Win Thin, a currency strategist at Brown Brothers Harriman in New York, noted that India and Russia were also net sellers of U.S. assets in December.

While the data “a cause for modest concern that bears watching,” he said, “we do not think the big global reserve managers are dumping U.S. dollar assets on a sustained basis.”

He said euro assets are not an attractive alternative with markets worried that Greece may not be able to make spending cuts necessary to get its swollen debt under control.

European Union ministers have offered Greece a pledge of support but stressed that Athens may need to commit to even more drastic spending and wage cuts.