Wednesday’s auction also alleviates analysts’ fears that massive U.S. borrowing would deter foreign buyers from increasing their holdings in U.S. government securities. [1]

Wednesday’s headline reasured with "Foreign Central Banks Snap Up Treasuries," [1] but yesterday’s Fed numbers tell a more ambiguous story. This week’s Reuters report [2] posts a marked week-over-week reduction in net buying of Treasury Debt by foreign central banks, although the number is still positive. Partially offsetting this trend was a recovery in the Agency Debt number — cenbanks managed a small net buy after last week’s moderate selloff. Agencies have been just holding their own over the last 8 weeks (following a 6 month selling spree) during which time treasuries added about $60 billion. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.[3] Here is Doom’s updated CSV version of the agencies and treasuries foreign central bank holdings data set.[4]

The components swung into something like balance this week, with treasuries up $5.453 billion and agencies up just $1.730 billion. The net rise in obligations then came in at $7.183 billion, sagging roughly a third from the increase posted last week and the one before. It’s possible the strong buy observed in Wednesday’s auction (and anticipated [5] in Thursday’s) will filter through to the Fed numbers next week. Doomers should watch for that, because a billion-dollar-a-day uptake of American obligations by cenbanks like we’ve been seeing over the last couple of months would not seem to be enough to effectively support the supply of the stuff coming down the pipe as the stimulus and bailouts kick in.

UPDATE: On Thursday Brad Setser had an important discussion [6] on whether central banks would reduce their buys, and if private investors would take up the slack.

Moreover, with global reserve growth slowing — total reserve growth was close to zero in q4, and it may not be all that much higher in q1 — central bank demand for Treasuries is likely to fall. Central bank purchases in the last part of 2008 were inflated by a shift out of Agencies, but that (presumably) won’t continue forever.

That implies, I think, that the ability of the US to finance large deficits at low rates depends far more than it has in the past on private investors willingness to buy Treasuries. That was in doubt a few weeks ago when the markets were focused on the risk of a Treasury bubble and the scale of the Treasury issuance associated with the stimulus and various bailouts. Now the market is more focused on the risks tied to a strong global downturn — and the remaining risks in the financial sector …

Both components of the raw numbers graph headed up this week, with minor divergence.

Twist’s ratios graphs resumed a down trend, but at a much reduced rate this week.

Interestingly, the Setser 52-week change graph is still testing records for treasuries (net buys since a year ago) and agencies (net sells).

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Notes and References

[1]: "Foreign Central Banks Snap Up Treasuries", by Melinda Peer, Forbes, February 25, 2009.

[2]: "Foreign central banks boost U.S. debt holdings", by Ellen Freilich, Reuters, February 26, 2009.

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

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

[5]: "TREASURIES: US bonds extend losses after 7-year auction", by John Parry, Reuters, February 26, 2009.

But indirect bidders, who include foreign central banks, took about 38 percent of the sale, a fairly high proportion.

[6]: "Who bought all the Treasuries the US issued in 2008? And who will be the big buyers in 2009?", by Brad Setser, Council on Foreign Relations, February 26, 2009.