After accumulating $21.4 billion of Canadian securities from February to May 2003, foreign investors reduced their holdings by $1.1 billion in June, Statistics Canada reported Monday.

Meanwhile, Canadian investors continued to purchase foreign bonds but resumed their selling of foreign equities.

Most of drop in foreign holdings came in the bond market, about $1 billion worth. There was also a smaller outflow from money market instruments, and a small inflow for stocks. Economists were way off on this number, they had expected a $4 billion inflow.

RBC Financial says that European investors were mostly responsible for June’s reduction in Canadian bonds. U.S. investment was flat for the second straight month.

“Today’s international securities transactions numbers are a slight disappointment given that foreign purchasers have been a huge source of demand for Canadian bonds and consequently, helped to explain a large part of the Canadian dollar’s recent resurgence,” RBC says.

“Nevertheless we continue to see Canadian assets remaining relatively attractive to yield hungry investors given that policy rate spreads compared to the U.S. remain positively tilted to Canada’s favour, despite the Bank of Canada recent reversal on interest rates. As such, the Canadian dollar should remain well supported.”

BMO Nesbitt Burns says that a narrowing in long-term spreads since June points to a further cooling in foreign demand for Canadian fixed-income product in the months ahead. CIBC World Markets agrees, noting, “With Canadian-US spreads a lot less juicy than they were earlier this year, and blossoming optimism regarding the state of the US recovery, expect to see more tepid portfolio inflows in coming months.”

Canadian investors also sold $200 million of foreign stocks in the month, but they bought foreign bonds. “StatsCan notes that the majority of the purchases were directed at the U.S. Treasury market,” reports Nesbitt. “Bad market timing, since Treasuries peaked in the middle of June.”