“The Fed is reminding the hyperventilating bond market that it needs to relax,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Inflation will be low for some time because the economic weakness will be with us for a time. They are not about to start to thinking about an exit strategy.” [1]
The above is an example of jawboning, the term a wonderful allusion to an Old Testament story. That, combined with an inability to actually do anything is what we at the Castle sometimes refer to as Ben’s state of Flexible Paralysis. Flexible, because when you’re immobilized you have the freedom to head-fake in any direction 
Notice, for example, that the Bloomberg story quoted above [1] features several obscure technical and mutually contradictory forecasts that serve different audiences. But doing that leads to the Two Constituencies Problem, and it’s why once a fiscal authority gets stuck on a number (like the present near-zero Fed target rate or the 6 month long maintenance of foreign central bank Agency Debt holdings within 1 percent of $810 billion) breaking either up or down from that number becomes a very serious business.
On the other hand, Brad sees cause for optimism [2] in the recent near-record growth in foreign central bank holdings of Treasury Debt, which is the climbing yellow line in the charts below. So it comes as a mild surprise that this week’s Reuters report [3] recorded very little net change in treasuries, along with almost none in agencies. 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 $1.890 billion net treasuries purchase is off more than 80 percent from last week’s figure, while agencies held their own with a sell-off of only $0.486 billion, cutting the size of last week’s modest dump by nearly 90 percent. The total increase of holdings was a mere $1.404 billion.
The agencies flatline continues to flirt with 6-month lows within the Tube of Bogosity.
Twist’s ratios graphs hardly moved this week.
The red line in Setser’s 52-week change graph bounced down because 52 weeks ago represents the 2nd-last big buy prior to the peak of agencies holdings, recorded 49 weeks ago. Almost regardless of what happens we should see the red line trend up in future weeks. Meanwhile, the treasuries buy 52 weeks ago was about the same as the one this week, so that line was flat. Convergence in the near term is almost inevitable.
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Notes and References
[1]: "Fed Douses Purchases Talk, Urges Investors to ‘Relax’ ", by Scott Lanman, Bloomberg, June 25, 2009.
[2]: "Near-record growth in the custodial holdings at the Fed; ongoing angst about the dollar’s role as a reserve currency", by Brad Setser, Council on Foreign Relations, June 24, 2009.
Central banks haven’t lost their appetite for Treasuries. At least not shorter-dated notes. John Jansen noted before yesterday’s 2-year auction “the central banks love that sector [of the curve].” And the auction result certainly didn’t give him cause to backtrack. Indirect bids — a proxy for central banks — snapped up close to 70% of the auction. …
[3]: "Foreign c.banks US Treasury holdings up in week-Fed", by Chris Reese, Reuters, June 25, 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.
