Foreign holdings of Canadian securities rose strongly in March for a second consecutive month, the result of a large investment in Canadian bonds, Statistics Canada reported Tuesday. In contrast, Canadian investors sold off a record amount of foreign equities, but continued to buy foreign bonds.

Foreign investors bought $8 billion of Canadian bonds in March. BMO Nesbitt Burns says that, with net selling of Canadian stocks and money market instruments, foreign holdings of Canadian securities rose by $6.9 billion in the month.

Nesbitt says that the bulk of the bond investment in March was into foreign market-issued securities from Canadian corporations and governments. “With only $2.8 billion of the net investment in Canadian bonds in Canadian dollar-denominated issues, foreign investors seemed to be more interested in higher Canadian yields than in making a currency play in March,” it notes.

“Add in the more than $5 billion net increase from February, and foreign investment in Canadian bonds has soared by $13.1 billion recently,” CIBC World Markets notes. “Outside of the flight to safety in the immediate wake of 9/11, that constitutes the largest two-month net foreign investment in Canadian bonds in a decade.”

CIBC notes that, in contrast to the wave of non-resident bond buying, foreigners were net sellers of money market paper and stocks. “Both asset categories have now seen net disinvestments through the first three months of the year.”

Canadians sold a record amount ($2.2 billion) of foreign equities in March, largely via reduced foreign equity mutual funds, CIBC says. “US stocks accounted for the majority of that reduction, although net holdings of overseas equities were also lighten up. The decline in stocks more than offset $1.3 billion in net bond investment, leaving Canadian investors net sellers of foreign securities to the tune of $1 billion in March.”

“With non-residents rushing into Canadian securities, and domestic investors losing interest in foreign portfolio assets, Canada is racking substantial net capital inflows. Through the first three months of the year, Canada has seen a $7.6 billion net portfolio inflow. Compare that with a $7.8 billion outflow during the same three months of 2002. Little wonder then, that the Canadian dollar had shot ahead by 7.5% as of March-end 2003, while it was struggling to even tread water a year earlier,” CIBC says.