If there’s a technical term for what we’re presently seeing in this story arc it’s The Fog of Battle.[1] One thing is becoming clearer, though. Brad has found [2] that foreign central banks are increasingly at the short end of treasuries. That means if the yellow line ever starts to reverse, they’re mostly poised to get out of Dodge quite rapidly. This week’s Reuters report [3] waxed strangely poetic over the fact that foreign central banks are still buying Treasury Debt at all. Never mind that this week’s figure was down by nearly 2/3rds from last week’s. 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]
Central banks still did manage to buy a half-way respectable $7.940 billion in treasuries, but dumped a modest $3.504 billion in agencies. In the week, they were well below the billion-a-day+ uptake needed to support the US stimulus. Perhaps just a "breather" from the last couple of huge weekly buys.
The red line is getting silly. The net move so far this year for cenbank holdings of Agency Debt is the size of a typical Yonkers NY strip mall. Agencies are down a microscopic $8 million since Dec 31st. If somebody’s been contracted to offset the actual foreign selling of agencies, they’d better put some variance into their counter-buys. Five months of perfectly flat results aren’t going to fool anyone.
Twist’s ratios graphs are down on the difference.
Setser’s 52-week change graph continues its divergence, if more mildly.
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Notes and References
[1]: "Treasurys Prices Attempt Rebound As Mortgages Slump", by Emily Barrett, Wall Street Journal, May 28, 2009.
The tipping point for Treasurys came early Wednesday afternoon, as the past few days of selling pushed yields to the point of discomfort for mortgage investors, who off-loaded government bonds in an effort to hedge a drop in refinancing activity.
That gave sudden momentum to the slide in Treasurys prices, which sent the benchmark 10-year yield to a fresh six-month high at 3.732% Wednesday, and opened the gap to the two-year yield to an all-time record of 2.75 percentage points. The 10-year rate seemed to be steadying, after a volatile morning’s trade, around 3.66%, but it’s still a long way from the 3.49% seen earlier this week.
Indeed, despite a round of purchases by the Treasury early Thursday, the impact on agency mortgage-backed securities is still outweighed by selling, which has spread from mortgage servicers, to money managers and leveraged investors.
"This is a big dislocation for mortgage bonds," said Mahesh Swaminathan, mortgages bond strategist at Credit Suisse. "Unless Treasury rates rally back it is difficult to see mortgages doing well in this environment," he said.
[2]: "The Treasury market, in a world no longer dominated by central bank reserve managers", by Brad Setzer, Council on Foreign Relations, May 27, 2009.
Yet even as the supply of notes has increased, central bank for longer-term Treasuries for their reserves has fallen. Central bank demand for longer-term Treasuries – on a rolling 12m basis – has been trending down since August 2008.
[3]: "Foreign cenbanks still buying Treasuries — Fed", by Pedro Nicolaci da Costa, Reuters, May 28, 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.
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Moin John,
will be fun to watch how foreigners will react when Ben will start version 2.0 of QE……
I would use every attempt from the Fed to monetize debt to sell my holdings to them….
Jan-Martin -
Thanks for dropping by
IMHO that whopping $0.008 billion agencies change so far this year isn’t a market effect, it’s a treaty. Care to guess which foreign cenbank(s) is doing the Treasury’s money laundering? [even Igor thinks the situation is "silly"]
And now we have all become indentured servants to our debt, like it or not: “We have a huge implicit mortgage on every household in America” said David Walker, a former U.S. comptroller general, the government’s top auditor.
“The latest increase raises federal obligations to a record $546,668 per household in 2008, according to the USA Today analysis. That’s quadruple what the average U.S. household owes for all mortgages, car loans, credit cards and other debt combined”
http://www.azcentral.com/news/articles/2009/05/29/20090529debt0529.html
Coffee -
Yeah, looks like we’re heading for the Chalmers Johnson style of dystopia. Meanwhile, though, there’s growing evidence the creditor nations are getting uncomfortable with all that debt.
“A Return to a Nasty External Dynamic?”, by Tim Duy, Economist’s View, May 28, 2009.
Jan-Martin-
What a delight it is to have you come by!