The Fed’s own holdings of MBS dropped an accelerating $5.723 billion and foreign central bank holdings of treasuries dramatically plunged ending a long winning streak, following up on last week’s dramatic sell-off in agencies. However, ZH has been reporting very strong demand for treasuries over the last couple of days, which doesn’t seem to make a great deal of sense except, perhaps we’re starting to see some odd effects coming out of the debt ceiling “crisis” …

WSJ (5/26 ’11): “Treasury Prices Rise As T-Bills Shortage Drives Demand Into Notes”

Indirect bidders, which include foreign buyers and central banks, expressed particularly strong interest. The group took down 47.1% of the sale–the highest proportion since last September. // The robust results came after a similarly well-bid two-year note auction Tuesday. Such marked interest in short-dated notes is likely due to the dwindling supply of U.S. Treasury bills, as the Treasury works to keep the nation’s debt holdings within its legal limit. That is causing a squeeze in the sub-one-year U.S. debt markets, forcing buyers to scoop up notes on the short end of the curve.

Pick your narrative: is Uncle Sam running out of (legal) debt? How can foreign central banks be purging their holdings and buying at the same time? Obviously something must be trying to shake loose.

UPDATE: Looks like Tyler scooped us on this one (nice charts over there too )

ZeroHedge (5/26 ’11): “Second Biggest Weekly Drop Ever In Treasurys Held In The Fed’s Custodial Account As Foreigners Dump”

One explanation is that while foreign investors are aggressively buying up the belly of the curve, they are even more aggressively selling the other parts of the curve, namely both the short (sub 2 Year) and the Long (10-30 Year). Another explanation is that the weekly change in Custodial data is largely noise and has no bearing on total foreign holdings of debt, which however we would largely discount. …

This week’s Reuters report¹ was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site,². Here is Doom’s updated CSV version³ of the agencies and treasuries foreign central bank holdings data set.

Treasury Debt holdings have now advanced only $71.157 billion above their 11/17 ’10 level.

Treasury Debt was down a shocking $18.683 billion, which ends the winning streak with a bang and reverses the previous three weeks’ worth of gains. This is the second biggest treasuries drop in the entire data set, the only bigger one occurring in the week that the collapse of Canada’s ABCP investment bank Coventree heralded the beginning of the world-wide credit crunch in the summer of ’07.

Agencies continued down, but by only $1.588 billion

*Agen-FM: The dotted line is the foreign central banks’ Agency Debt holdings reduced by the level of the Fed’s own MBS holdings. Since the FRBNY itself is a lightly audited peculiar amalgam of foreign & domestic, central and private bank I think it might be useful to consider the hypothesis that for a while starting in January 2009 the Fed’s MBS holdings were being quietly deemed to be “foreign.” That is, for the first half of ’09 the dotted line seems more sensible than the red one.

The net of US obligations collapsed by $20.272 billion, nearly twice last week’s big loss. If my adventures with H.4.1′s data download program and OpenOffice Calc didn’t result in an error, this appears to be the second biggest combined selloff going back to mid-Dec 2002.  The #1 dump was from a year ago and I don’t recall the context of that one. Thanks to twist for her chart help on short notice The number has now risen by $84.463 billion in the twenty seven weeks since last November 17th, with this week’s action trimming nearly a fifth of that gain.

Twist’s ratio graphs surged up this week.

The Setzer numbers both dived down.

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Notes and References

[1]: “Foreign central banks’ US debt holdings fall – Fed”, by Gertrude Chavez-Dreyfuss, Reuters, May 26, 2011.

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

[3]: The updated data set as a Comma Separated Value (CSV) file is here (includes Fed’s own MBS holdings).

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