Brad and his merry band of readers at the CFR are having a lively discussion [1] on whether Chinese public opinion might turn against their government’s massive holdings of US debt. But meanwhile, this week’s Reuters report [2] documented a redoubling of the surge of foreign central banks into Treasury Debt. 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]
Speaking of redoubling, the cenbanks’ large $15.757 billion treasuries buy was almost precisely twice last week’s figure. This was partly balanced by a modest $3.643 billion selloff in agencies, which sends the central banks’ Agency Debt holdings towards the lower range of their $810 billion plus-or-minus $7 billion Tube of Bogosity where that number has been living since the last day of 2008.
Two weeks ago Brad indulged in a bit of understatement [5] about the recent agencies anomaly.
The rise in Treasury holdings clearly no longer reflects a shift out of Agencies. Custodial holdings of Agencies have been flat recently.
Indeed, his 13-week change graph immediately following that quote clearly shows there were periods of stagnant Agency Debt holdings levels in late 2002 and 2004, but never immediately following such a historic bout of volatility. Frankly, this situation reeks. If the levels hold for 4 more weeks and we see a resumption of the late ’08 downward trend starting with the July 8th number it would be just about an advertisement that someone contracted to keep the red line flat for the first half of ’09.
Twist sends a link that makes this situation sound even weirder. Yesterday the Fed was riding the Agency Debt market like it was a bucking bronco.[6] The flat cenbank number makes less sense every week. Could the Federal Reserve itself be a "Foreign Central Bank?"
Well maybe not. Twist thinks that a simpler explanation is that it’s not a foreign bank behaving oddly but the Fed lending them the money to do something they wouldn’t ordinarily consider. She points at this mid-February speech [7] where Ben himself seems to be hinting at wheels within wheels.
Because interbank markets are global in scope, the Federal Reserve has also approved temporary bilateral liquidity agreements with 14 foreign central banks. These so-called currency swap facilities have allowed these central banks to acquire dollars from the Federal Reserve that they may lend to financial institutions in their own jurisdictions. The purpose of these swaps is to ease conditions in dollar funding markets globally. …
OK, it’s safe for Doomers to remove their tinfoil hats now 
Twist’s ratios graphs continue to trend down.
Setser’s 52-week change graph got another stiff shot of divergence last week.
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Notes and References
[1]: "Change or more of the same?", by Brad Setser, Council on Foreign Relations, June 4, 2009.
[2]: "Foreign cbanks’ US Treasury holdings up – Fed", by Burton Frierson, Reuters, June 4, 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]: "Central banks still (heart) dollar reserves", by Brad Setser, Council on Foreign Relations, May 22, 2009.
[6]: "CREDIT MARKETS: Investors Continue To Favor Corporate Debt", by Romy Varghese, Wall Street Journal, June 4, 2009.
The Federal Reserve bought net $25.833 billion of agency mortgage-backed securities for the week ended June 3. The Fed’s purchases included its attempts to stem the frenzied selling of these bonds on Wednesday as investors sold on fears about rising Treasury yields. The Fed also sold $1.843 billion of these bonds, with a commitment to buy them later. Most of the central bank’s purchases were in the lower coupons of 4, 4.5s and 5s, as usual. The bank bought $19.8 billion of Fannie Mae bonds, $4.95 billion of Freddie Mac bonds and $2.925 billion of Ginnie bonds. With these buys, the Fed’s total purchase of agency mortgages now stands at $532.899 billion.
Mortgage-backed securities were slightly weaker Thursday afternoon amid a sell-off in the Treasury market, said Arthur Frank, head of MBS research at Deutsche Bank Securities. "We’ve been seesawing all day," Frank said. Risk premiums were 4 basis points wider to Treasurys and 2 basis points wider to swaps. Frank said there has been some hedging-related selling from servicers, adding that origination was moderate and "the Fed bought its usual amount."
[7]: "Federal Reserve Policies to Ease Credit and Their Implications for the Fed’s Balance Sheet" (speech), by Ben Bernanke, Federal Reserve, February 18, 2009.
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