On Wednesday Nouriel Roubini posted a NYT Op-Ed [1] predicting that the US dollar was in danger of losing its world reserve currency status to the Chinese Renminbi. On the other hand, Brad Setser noted later that evening [2] that for the present foreign central banks seem to have a hearty appetite for T-Bills, regardless of what they’ve been saying about them. [UPDATE: Setser's response to Roubini [7] is now up.] I outlined my concerns about the constant agencies holdings value we’ve been following here in a comment under that second article, and Brad was kind enough to address that in a reply comment as follows:

May 14th, 2009 at 3:13 pm
bsetser responds:

John — Russia was a big seller, but it cannot sell more than it has, and it no longer has any agencies. Chinese sales seem to have slowed a bit (or Chinese sales are offset by someone else buying). I suspect that other central banks were comforted by the fed’s purchases — they know the us isn’t gonna default on something the fed holds a lot of. Signalling. And a dem congress and dem president aren’t hostile to the agencies in the way the Rs are, so there might be more confidence there as well.

And later twist contributed this find [3] that suggests a bubble forming in T-bill yields. Obviously the situation is still volatile.

Or volcanic. This week’s Reuters report [4] documented the 2nd largest increase in Treasury Debt holdings by foreign central banks recorded since the Feb 2000 start of this data set. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.[5] Here is Doom’s updated CSV version of the agencies and treasuries foreign central bank holdings data set.[6]

Central banks bought a huge $29.341 billion dollars worth of Treasury Debt, eclipsing the old second place figure, that you can see is only four weeks old. They also tucked into a hearty $5.393 billion of new Agency Debt.

The graph of treasuries is now starting to climb a wall again, while after 20 flat weeks the agencies line may be bending up just a bit.

In spite of the largish absolute increase in Agency Debt holdings, twist’s ratios graphs headed back down on the huge treasuries buy.

Setser’s 52-week change graph captures yet more divergence.

________________________

Notes and References

[1]: "The Almighty Remninbi?", by Nouriel Roubini, New York Times, May 13, 2009.

THE 19th century was dominated by the British Empire, the 20th century by the United States. We may now be entering the Asian century, dominated by a rising China and its currency. While the dollar’s status as the major reserve currency will not vanish overnight, we can no longer take it for granted. Sooner than we think, the dollar may be challenged by other currencies, most likely the Chinese renminbi. This would have serious costs for America, as our ability to finance our budget and trade deficits cheaply would disappear.

[2]: "Not putting your money where your mouth is", by Brad Setser, Council on Foreign Relations, May 13, 2009.

In March, China’s premier expressed concern about the safety of China’s (large) investment in the US, including China’s investment in Treasuries. China’s citizens have realized — rather belatedly — the risks associated with holding more reserves than China really needs.*

And some in Japan are also now starting to worry about the safety of Japan’s dollar-denominated Treasuries.

You might think — based on all this chatter — that central bank demand for US Treasuries has waned.

It hasn’t.

[3]: "Is This The Shape Of A Treasury Bubble?", by Joe Weisenthal, Business Insider, May 14, 2009.

[4]: "Foreign cenbanks buyers of US debt in week — Fed", by Chris Reese, Reuters, May 14, 2009.

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

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

[7]: "Different conceptions of China’s future role in the global financial system", by Brad Setser, Council on Foreign Relations, May 15, 2009.