Cross-border investments at high levels

By Herbert Lash

NEW YORK (Reuters) - Institutional investors last week shrugged off rising government bond yields and bought euro-zone stocks at a rate close to all-time highs, the senior currency strategist at State Street Global Markets said on Tuesday.

Cross-border institutional investment flows into emerging Asia stocks, with the exception of China and India, also were close to all-time highs, Brian Garvey told the Reuters Investment Outlook Summit in New York.

An analysis of $12.3 trillion in custodial assets at parent State Street Corp. SST.N through last Thursday suggests rising yields are based on expectations of economic growth, and not concerns about faster inflation, Garvey said.

"We're still seeing healthy cross-border equity investment, particularly into Asia, which is an area where you'd usually see a pullback during periods of risk aversion," he said.

"What's interesting is that in May we moved back into the 'leveraged regime,' he said. "Despite the rise in yields it looks like investors are still adding risk to their portfolios, at least from an equity perspective."

After two major U.S. stock gauges set all-time highs last week, equity markets sold off during a bond rout that lifted the yield of the benchmark 10-year U.S. Treasury note's <US10YT=RR> past the psychological barrier of 5 percent.

U.S. government bond prices sank further on Tuesday, pushing benchmark yields to a five-year high, as investors fretted that strong global demand will force central banks to raise interest rates.

The yield on the 10-year note jumped to 5.27 percent, exceeding the fed funds rate target currently at 5.25 percent.

Investor desires to increase the diversification of their portfolios is why there is a positive liquidity back-drop and the magnitude of flows going abroad is so large, Garvey said.

"This is very much a factor of U.S. investors investing abroad," he said.

Cross-border flows into euro-zone stocks in the 5- and 10-day periods ended June 7 were at 99.3 percent of all similar periods since 1994, according to data from State Street, one of the world's leading custodian banks.

Data is only available since 1994.

Flows into euro-zone stocks were at their highest-ever level since 1994 in the 20 and 60 days ended June 7, according to State Street.

And for five Asian countries, inflows in the 5 days ended June 7 were also at high rates compared to periods since 1994.For Korea inflows were at 94.7 percent, for Malaysia at 98 percent, for the Philippines 98.5 percent, for Taiwan 83.2 percent, and for Thailand 98 percent.

However, flows into major Latin American markets were well off all-time highs. Flows into Brazil, Chile and Argentine were at 30 percent of their highs, while flows into Mexico were at almost 52 percent.