Foreign Central Banks and Agency Debt: 2000 to Present

Yesterday Reuters reported [1] that foreign central banks have been net sellers of agency debt, the senior debt of GSEs like Fannie Mae and Freddie Mac, for the sixth straight week. In order to get a better handle on the context for this story, Doom went to The NY Fed’s H.4.1 table [2] and extracted their weekly statistics on the holdings by foreign central banks of US treasuries and agencies. We collected [3] the data back to the start of the series on Wednesday Feb 9, 2000.

When Twist performed her chart magic on the data some interesting trends emerged. From the start of 2007 to the present, agencies as compared to treasuries held by cenbanks increased smoothly from 52 to 74 percent, then fell off noticeably over the last few weeks. It is possible that the present GSE crisis is affecting the appetite for agency debt among foreign central bankers.

If we stretch the timeline for this graph back to the beginning of the data in early 2000, we see that the upward trend commenced in late 2004.

Agencies were only about 23 percent of treasuries then.

Simply graphing the absolute cenbanks holdings from 2000 tells an important tale. It’s evident that the foreign central bankers’ exposure to (mostly) Fannie’s and Freddie’s debt increased smoothly and exponentially throughout the great US housing bubble, and even through the first year and a half of the subprime crisis.

The big question is: What happens now?

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Notes and References

[1]: "Foreign cenbanks sell agency debt for sixth week", Reuters, August 28, 2008.

[2]: "H.4.1 Factors Affecting Reserve Balances", Federal Reserve Statistical Release (weekly), Federal Reserve Bank of New York.

[3]: We formatted the data set as a Comma Separated Value (CSV) file here. Enjoy.

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4 Comments for this entry

  1. entropy says:
    August 29, 2008 at 7:37 AM

    I am quite the amateur in economics, but from everything I have read to date a continued and prolonged decline in the related graphs is not a good sign. Some have opined that this scenario could be catastrophic to our economy.

    I think the most pressing point is no one really knows where/when/how this will end…….. strange times indeed.

  2. twist says:
    August 29, 2008 at 11:39 AM

    John-

    After I hit the “Insert Graph” button for the ratios I looked at the trend and thought, “Hey, I know that bubble.” There was a sharp rise in the demand for agency debt when the demand for housing rose. While the decline has been happening later than the housing bust, and we’re still early in this cycle, it does look like this potentially has a lot of room to fall.

    Igor says “Chap 11″. Maybe for anyone else, but not the agencies.

  3. John M. says:
    August 30, 2008 at 7:26 PM

    Awareness of the sudden sea-change in foreign demand for agencies is becoming general.

    “Fannie-Freddie doubts grow”, by Saskia Scholtes, Financial Times, August 30, 2008.

    Federal Reserve custody data on Thursday showed foreign official and private investors reduced their holdings of agency debt for the sixth consecutive week.

    Bill O’Donnell, analyst at UBS said: “If this recent theme of cooling passions for GSE’s debt becomes a longer-term trend, then it could be problematic for the GSEs given that the central banks have taken . . . roughly 30 to 60 per cent of new GSE issuance in recent months and years.”

  4. John M. says:
    September 3, 2008 at 11:00 AM

    This article is an important addition to the discussion about central bank appetite for agencies vs treasuries:

    “Yes, Virginia – Creditors do sometimes get a vote …”, by Brad Setser, Council on Foreign Relations, September 2, 2008.

    No wonder that the options market is now implies a significant probability that the Agencies existing common equity will be worth zero; look at this chart produced by Paul Swartz, a colleague of mine at the Center for Geoeconomic Studies.

    If these trends continue for much longer, US Treasury Secretary Paulson will be forced to show his hand. The Agencies won’t be able to rollover their debt — at least not at a spread that works for them. The US government will then either have to step or let the Agencies fail. And, well, letting the Agencies fail, in the sense of default on their debt, is probably more than the US government is willing to consider right now. Any restructuring though would likely be bad for the holders of the Agencies common equity.

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