Non-residents invested $1.2 billion in Canadian securities in December, largely equities, Statistics Canada reported today.

Over the year, foreign portfolio investors sold $33.8 billion worth of Canadian securities, largely reflecting high foreign-takeover activity and the subsequent relinquishing of Canadian portfolio shares to foreign direct investors.

Non-residents reduced $492 million from their holdings of Canadian bonds in December, after adding $4.8 billion in November.

The drop was concentrated in federal government issues ($4.1 billion), largely outstanding bonds.

Foreign investors also disposed of $614 million worth of provincial government bonds, mainly due to sizable retirements.

But non-residents continued heavy acquisitions of federal government enterprise bonds, both new and outstanding issues.

Overall, foreign investors picked up $3.9 billion in bonds issued by federal government enterprises, ending the quarter with a record $6.5 billion acquisition.

Currency-wise, non-residents increased holdings of U.S. dollar-denominated Canadian bonds and reduced holdings of bonds denominated in other currencies.

Foreign investors acquired $460 million worth of Canadian money market instruments in December, following two months of consecutive divestment totalling $1 billion.

The interest rate differential between Canada and the United States further widened to 86 basis points in December, the largest spread since June 2004, in favour of investment in Canada.

Canadian investors cut back of foreign debt investments

Meanwhile, Canadian investors acquired $1.9 billion worth of foreign securities, adding equities and further reducing debt instruments.

StatsCan said the meltdown in the subprime mortgage sector and the resulting credit crunch have contributed to major divestments of foreign debt instruments.

Since August 2007, Canadians have removed $20 billion worth of foreign debt instruments from their portfolios, which largely offset a $35.3-billion investment from January to July 2007.