The Federal Reserve has alluded to stepping in and buying its own debt to prop up demand, supporting prices and keeping yields in line. [1]

“We’re seeing a bit of indigestion” [2]

Just before yesterday’s NY Fed H.4.1 numbers came out, we were contemplating the evening star and the lovely New Moon that had recently heralded the Chinese Year of the Ox. Well, East Asia’s party season has now ended, and the central bankers at countries like Japan and China are back to work. Looks like that new Ox may not have an infinite capacity for Treasury Debt. As is the case with the other traditional buyers of treasuries, the prospect of oversupply seems to be resulting in growing symptoms of indigestion among the cenbanks.

UPDATE: Over at the CFR, Brad Setser is offering additional insight,[6] including the following chart, with a pattern that should be all too familiar to Doomers:

This general loss of appetite at T-bill auctions seems to be provoking some funny behavior. Twist was kind enough to inform me yesterday (unfortunately I’ve never been on eBay or similar) that when you participate in an auction that’s selling your own stuff, it’s called shill bidding. I suppose that when you do it openly on a truly massive scale, it’s also called "innovative." I have experienced something like this before, however. For every serious computer programmer, there comes a moment when she discovers the wonders of tail recursion. There also comes a moment (about 10 minutes later) when she discovers it’s possible for an operating system to run out of virtual memory. I’m wondering if the evident peaking of the yellow line in twist’s update of Setser’s graph might also herald an instance of stack overflow.

UPDATE: Sorry for the mix-up, I originally specified the slightly different graph (below).  This graph is the raw cenbank holdings of treasuries and agencies with a window covering the previous 52 weeks.  You can see how the lines suggest the possible start of a convergence move, although not quite as dramatically as in the Setser graph.

 

This week’s Reuters report [3] records a trend-busting reversal. Foreign central bank Treasury Debt holdings were down a small but non-trivial $4.594 billion, a bigger selloff than has been seen in a long time. Meanwhile, cenbanks added a whopping $11.287 billion of agencies, perhaps reversing a trend of more than a half-year’s duration. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.[4] Here is Doom’s updated CSV version of the agencies and treasuries foreign central bank holdings data set.[5]

This week’s wild gyrations in the numbers resulted in a net $6.693 billion increase in cenbank holdings of US obligations. This is down nearly half from last week’s healthy level, and as mentioned in this space last week, cenbank appetite for this stuff is critical for Obama’s people to finance their bailouts at an affordable cost.

Divergence in the raw-numbers graph strongly reversed last week.

… and that caused twist’s ratio graphs to rebound. If this week’s result wasn’t some sort of anomaly caused by something like the effect of the big holiday in Asia, we could well be seeing the beginning of a whole new phase of the crisis.

________________________

Notes and References

[1]: "Government debt prices slide: Treasurys prices slip as investors debate the Fed’s intention to buy long term debt", by Catherine Clifford, CNN Money, January 29, 2009.

[2]: "Treasuries Drop as Record Sale Draws Higher-Than-Forecast Yield", by Daniel Kruger and Anchalee Worrachate, Bloomberg, January 29, 2009.

[3]: "Foreign central banks Treasury holdings down – Fed", by Burton Frierson, Reuters, January 19, 2009.

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

[5]: The updated data set as a Comma Separated Value (CSV) file is here.

[6]: "Secrets of SAFE: A trillion of Treasuries here, a trillion there and pretty soon you are talking about real money …", by Brad Setser, Council on Foreign Relations blog, January 30, 2009.