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Friday, August 24, 2007


foreign central bank selling of treasuries

brad setser channels russ winter to divine that foreign central banks have become fairly aggressive sellers of treasuries.

Using the end of week data, the Fed’s custodial holdings of Treasuries fell by $44.2b from August 1 to August 23. That’s big. Most of the fall came in the past two weeks.

Custodial holdings of Agencies rose by $12.6b – offsetting some of the fall in Treasury holdings. But overall central bank custodial holdings still fell significantly – by close to $30b. That hasn’t happened for a while.

And, obviously, central banks reduced Treasury holdings didn’t exactly imply reduced demand for Treasuries. Treasury yields fell (and prices rose). The ten year yield fell from 4.8% or so to 4.6%; T-bill yields went from around 5% to around 4% with a little detour down to 3% on Monday.

That, on the surface, seems like a refutation of the argument that central bank demand has played a key role in keeping Treasury yields down over the past few years.

So what is happening?

Well, there obviously has been a bit of a liquidity crisis, as investors lost confidence in a lot of CDOs -- and financial firms that borrowed in the money market to purchase CDOs. The total stock of outstanding commercial paper fell by about $200b over the past two weeks – and a lot of money that wasn’t reinvested as commercial paper matured seems to have flowed into the Treasury market.

Foreign central banks, judging from the Fed’s data, helped meet that demand.

disaster? probably not -- foreign banks financing emerging-market capital outflows, thinks setser, in a period of risk aversion. but the data might be useful in the future.

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