As reported [1] yesterday by Reuters, foreign central banks sold a net $9.75 billion of agency debt in the week ended September 3rd. Reuters extracted the data from FRBNY’s weekly statistical release H.4.1 [2] and Doom has added the last week’s data to our CSV file going back to early 2000.[3]
Last week Doom provided some context to the recent cenbank agencies move and you will see that this week’s report extends and strengthens the trend. Foreign central banks have sold agencies now for seven consecutive weeks, but this last week’s amount is considerably larger than any of the previous six.
Stretching the timeline back to 2000, there now appears to be a tiny but visible downward tick in what had been a pretty steady and longstanding upward trend.
Is this a temporary reversal or has the tide truly changed? The New York Times is reporting [4] that China’s central bank is actually short of capital amid accusations from rival government departments that it overdid the buying of assets like US government obligations. Looks like they won’t be back into the market soon.
The last two months haven’t made much of a dent in the chart of cbanks’ treasury and agency holdings, but you can see that over the last several years we have arrived at a very high place.
Earlier this week Bill Gross suggested [5] that private sector players like banks and bond funds were also well filled with agency debt, so that another player would have to step up to buy the stuff. Thursday he and Jim Cramer addressed Paulson and the Treasury in a CNBC video,[6] requesting that the government open up its balance sheet to support the market.
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Notes and References
[1]: "Foreign central banks cut U.S. agency holdings – Fed", Reuters, September 4, 2008.
Foreign central banks reduced their U.S. agency security holdings at the Federal Reserve by $9.75 billion in the latest week to a total of $958.57 billion, according to data from the central bank released on Thursday.
The data may add to recent evidence that overseas investors are worried about the troubled mortgage giants.
…Overall, the Fed’s holdings of U.S. Treasury and agency securities kept for overseas central banks, including Treasury notes and bonds as well as agency securities, fell by $13.48 billion to stand at a total of $2.395 trillion in the latest week ending Sept. 3, the Fed data showed.
Overseas central banks reduced their Treasury debt holdings by $3.72 billion to stand at $1.437 trillion.
[2]: "H.4.1 Factors Affecting Reserve Balances", Federal Reserve Statistical Release (weekly), Federal Reserve Bank of New York.
[3]: The updated data set as a Comma Separated Value (CSV) file is here.
[4]: "China’s Central Bank Is Short of Capital", by Keith Bradsher, New York Times, September 4, 2008.
China’s central bank is in a bind.
It has been on a buying binge in the United States over the last seven years, snapping up roughly $1 trillion worth of Treasury bonds and mortgage-backed debt issued by Fannie Mae and Freddie Mac.
Those investments have been declining sharply in value when converted from dollars into the strong yuan, casting a spotlight on the central bank’s tiny capital base. The bank’s capital, just $3.2 billion, has not grown during the buying spree, despite private warnings from the International Monetary Fund.
[5]: "U.S. Must Buy Assets to Prevent ‘Financial Tsunami,’ Gross Says", by Jody Shenn, Bloomberg, September 4, 2008.
A process of “delevering,” where banks are shrinking and cutting off lending, is sapping demand for loans, bonds, stocks and commodities, driving down prices of assets of even “impeccable quality,” Gross said. The decline may continue until the government steps in as a buyer, he said.
“Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami,” Gross of Newport Beach, California-based Pacific Investment Management Co. said in commentary posted on the firm’s Web site today. “If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury.”
[6]: "Where’s the bull market? Bill Gross, CIO of Pimco, and Mad Money’s Jim Cramer weigh in", CNBC video, September 4, 2008.
Here’s a bit more evidence (as usual Moscow provides all information short of facts):
“Russia says further cuts Freddie, Fannie holding”, Reuters, September 5, 2008.
The only amazement is that anyone would care to loan the U.S. more money.
Our National Debt has risen by approx. 1117% since 1980! There is an end to the amount of debt that any nation can incur.
In 1980, the U.S. was the largest creditor nation on earth, by 2005, we had become the largest debtor nation on earth.
In the first 204 years of our existence, our accumulated National Debt was $850 Billion.
Congress recently raised the Debt Ceiling by $800 Billion for one year!
This is not a small micro problem that can be fixed with growth, yet that seems to be the opinion that prevails.
The sudden and historic 7-week-old leg downwards in the two graphs at the head of this post are caused by treasuries increasing (yields falling) while agencies fall (yields rising). The following rather baffling article tries to trumpet the government’s ambiguous efforts as a good reason why this trend will immediately end after actions supposedly set to happen over the weekend (maybe):
“Treasuries Drop on Speculation of Government to Assist Agencies”, by Dakin Campbell and Daniel Kruger, Bloomberg, September 5, 2008.
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P.S.
I thought I recognized that particular brand of econo-baffle squid-ink
Doom cited Mr. Slok in The Inequality Firewall (Feb 9, 2007), a post that discussed government and industry efforts to proclaim containment of the incipient subprime crisis. Doomers should go to the link to review Slok’s arguments (since, sadly, overtaken by events
) but I’m going to take the liberty of repeating what this blogger thought of them at the time.
I prefer not to think about how much Slok gets paid to say what he says compared with what we in the Castle rake in. (and you can stop looking at me like that Igor, you get license fees and all the spam you can eat)
P.P.S. It was great fun re-reading the comments from that early 2007 post. Crispy, Aaron and the gang — even Igor — were really smokin’ that week!
Fannie & Freddie: meet FDIC Friday.
“Rescue plan near for Fannie and Freddie”, Financial Times, September 6, 2008.
Many credible stories on this followed the markets’ close, including one that mentioned catered food all weekend at FHouFA.
“Panic,” says Igor.
“U.S. Rescue Seen at Hand for 2 Mortgage Giants”, by Stephen Labaton and Andrew Ross Sorkin, New York Times, September 5, 2008.