Foreign investors, who have helped finance the U.S. trade deficit with the rest of the world by buying huge amounts of Treasury debt in recent years, could be losing their taste for Uncle Sam's promissory notes.

Statistics kept by the Securities Industry Association (SIA) show that through the first five months of the year, foreign investors sold Treasuries at a net annualized rate of $35.8 billion. That compares with net purchases of $48.7 billion in 1998. The reversal in capital inflows into Treasuries from abroad, if it continues, would mark the first time since 1974 that foreigners have sold more Treasuries than they have bought.

But, as the chart at the right shows, foreigners are not fleeing all U.S. securities. For the year, foreigners have been buying U.S. securities at just about the same pace as last year, at an annualized rate of about $278 billion. But while they have been shunning Treasuries, they have been bulking up on stocks, corporate bonds and so-called "agencies"--debt instruments issued by government-chartered corporations such as Fannie Mae--at record rates.

The fact that foreigners may not so much be losing their desire for U.S. securities as changing the flavor of what they buy could have significant ramifications for the U.S. stock markets. In recent months, there has been a lot of hand-wringing on Wall Street over whether foreigners would shift their discretionary capital--referred to in some quarters as "hot money"--away from the United States and back into Europe and Japan, as those economies pick up steam and their markets outperform those in the United States.

Some analysts believe this is already taking place and say it explains why the dollar has fallen in value relative to the Japanese yen in recent weeks. A similar scenario played itself out in 1987, partly leading to the stock market crash in October of that year.

As the dollar weakens and dollar-denominated investments lose value relative to foreign currencies, then interest rates would have to rise to compete for foreign capital. The higher rates, in turn, would become a drag on the stock markets.

The SIA numbers already show a decline in the amount of U.S. securities bought by foreigners from the feverish pace of just a few years back. In 1995, for example, foreigners snapped up a net $231.9 billion in U.S. securities. Two years later, that had reached a record $387.9 billion. But last year, driven by a sharp fall-off in purchases of Treasuries, the total slipped to $278.3 billion.

But if foreigners are just shifting their tastes from bonds to stocks, that could be bullish for equities because it would represent a new source of cash to prop up what are already historically high valuations. A growing global economy means the pie of capital also expands. And that would help mitigate any effects of a shift in direction of capital flows, said J.P. Morgan & Co. economist Bruce Kasman.

Furthermore, while foreign investors may be seeing some better prospects in markets outside the United States, there has been no stampede by U.S. investors back into foreign markets. Many suffered huge losses during the Asian financial crisis that began in the summer of 1997 and only recently has ebbed.

For the first five months of the year, U.S. investors sold off $16.3 billion in foreign stocks--a trend that if it continues for the full year would mark the first time in half a century that U.S. investors have been net sellers of overseas securities.

Then there's the unknown of the year 2000, or "Y2K," computer problem, which some analysts believe could lead to disruption in global financial markets if computers fail because their internal clocks have not been updated. Whenever there is turbulence in world financial markets or in the global political scene, capital tends to retreat to "safe harbors." In international finance, there is no greater security haven than U.S. government bonds. For that reason, some analysts believe foreign money could flock to Treasuries through the rest of this year.

The SIA data could reflect a different trend, suggesting foreign investors are beginning to behave much as U.S. investors have over the past decade. With aging populations and changes in retirement plans, workers in Europe and Japan are facing some of the same pressing financial issues as their colleagues in the United States. They have watched with the awe as U.S. markets have proved the place to be in recent years. Is it any wonder that they, too, are seeking the higher returns of the U.S. stock market or of corporate bonds compared with U.S. Treasuries?

"In one sense, they are buying less Treasuries," said David Strongin, director of international finance at the securities trade group. "But what I see perhaps is a more secular shift out of Treasuries and into higher-yielding U.S. assets."

Strongin said that governments in Europe have been pushing citizens to take on more responsibility for their retirements. The government pension systems in England and Sweden are both partially privatized, for example. What this means is that individuals who buy mutual funds or directly invest in stocks may find it beneficial to do so in U.S. markets.

"Europeans are going to have to provide for more of their own retirement," Strongin said, adding that this argues for a continuation of the shift of foreign investment into U.S. equities.