from Follow the Money

Already Conventional Wisdom?

January 6, 2005

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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It seems like Asian central bank support for the Treasury market -- and other fixed income markets -- has become part of the conventional wisdom recently. We know Bill Gross has long worried about the risks associated with holding an asset whose value depends on the kindness of strangers -- and about the risk of shorting an asset whose value could rise if the Bank of Japan resumes big time intervention.

But the dollar/ Asian reserves/ central bank support for US fixed income nexus seems to have become the dominant rubric that Wall Street strategists are using to analyze the US fixed income market, judging from today’s Wall Street Journal article by Agnes Crane: "What’s Ahead for Bond Funds."

To quote Michelle Keeley of American Express as quoted in the Journal: [the fate of the dollar] "is certainly a market fixation and right so given how much of our debt is absorbed overseas. There is no question that if they absorb less, that’s not great for us. If foreigners stop sponsoring our market, interest rates would go much higher."

Now the only thing left to do is to figure out when central bank support will stop!

One quibble, though, with another Journal story: "Currency Traders Bet on Asia." Craig Karmin writes "Asian governments have accumulated large dollar reserves and feel less compelled than they did in the aftermath of the 1997 crisis to add more." Maybe. But the pace of reserve accumulation in the fourth quarter hardly suggests that Asian central banks have been on the sidelines. Korea’s reserves were up $25 billion in q4, much more than in q1; Malaysia’s reserves are up about $6 billion, about the same pace as in q1; Taiwan’s reserves were up $10 billion through November, not quite the q1 pace but still not a small number. It simply is not true that "with intervention curbed in the final two months, Asian currencies rallied against the dollar." It would be more accurate to say "Asian currencies rallied in spite of large central bank purchases of dollars, and would have rallied even more if Asian central banks had been out of the market."

Try googling "Korea" and "foreign currency reserves." This data is not hard to find.

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