from Follow the Money

The central bank bid

December 8, 2004

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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 America’s biggest creditors stepped up to the plate today. China’s rapidly growing reserves have to go somewhere ...

From Bloomberg:

"So-called indirect bidders, which include the foreign central banks, were awarded 65.8 percent of the $15 billion of five-year notes sold today, the biggest share on record since the Treasury reporting the figure in May 2003. Primary dealers won 34.1 percent of the notes, the smallest on record. The balance went to customers buying directly from the Treasury.

The notes, which mature in December 2009, were sold at a yield of 3.55 percent, where they traded minutes before the 1 p.m. bidding deadline.

The Treasury will auction $9 billion of 9 11/12-year notes tomorrow."

Some central banks may be shifting from short dated treasuries to longer dated Treasuries to get a higher yield -- the opposite of the buyers strike scenario I mentioned in an earlier post.

A bit further down in the same article, Bloomberg tells us that foreign central banks did not buy as many bonds last quarter.

"Foreign governments are slowing their purchases of U.S. bonds, based on government debt held in custody at the New York Fed. The increase this quarter is $12.8 billion, compared with $48.4 billion last quarter. Foreigners held $1.85 trillion, or 48 percent, of the $3.85 trillion of tradable Treasuries outstanding in September, according to the Treasury Department."

I personally would not jump to that conclusion. Japan tends to buy Treasuries rather transparently. Others less so -- foreign central banks buying through foreign broker dealers would not show up in the Treasury data. Japan bought fewer Treasuries in the third quarter than in the first and second quarter. Hiding your Treasury buying makes it easier to hide your Treasury selling at some point in the future ... it keeps your options open.

Still, right now it seems that a stronger dollar is slowing growth in Japan and Europe, leading investors to conclude Japan and the ECB will enter the FX market to stop the dollar’s fall (or perhaps a few players are just taking profits). And China’s reserve accumulation has accelerated this quarter. The more China, and others, intervene, the longer Treasury yields can stay low, supporting the US expansion.

The price: still growing global imbalances, and ever increasing US external debt. Update: Foreign central banks showed less interest in the reopened 10 year bond.

From Reuters:

"However, indirect bidders, including private investors and foreign central banks, picked up only $879 million, or 10 percent of the whole issue. That compares to 40 percent in the original sale of the notes in November but at least was better than the paltry 2.8 percent seen at the last reopening. "

It seems like foreign central banks generally are less keen on reopened issues: they don’t want more of the same bond they just bought in the initial auction a few weeks ago. So the low participation per se is not a sign they are losing interest in Treasuries. But it also seems that yesterday’s high central bank participation may have reflected a need to roll over maturing bonds rather than new central bank flows into the US treasury market.

Reuters money quote: "Indirect bidder participation was low," said one trader at a U.S. primary dealer. "Foreigners have not been buyers of this market, even in yesterday’s five-year sale."

Bloomberg money quote: ``We haven’t seen much buying from Asian accounts in Treasuries lately,’’ Matthew Wakabayashi, a bond trader at the Tokyo unit of Banc of America Securities LLC, said before the auction. The firm is also a primary dealer. ``We’re bearish on bonds.’’

Makes some sense -- the biggest buyer of Treasuries this year has been the Bank of Japan (acting for the MOF), and they have not been intervening in the market since the spring, so they don’t have any new funds to place in Treasuries. China’s reserves are growing fast, but China is less keen on the Treasury market ...

I would not buy 10 year Snow bonds at 4.15 either -- the central banks may simply have concluded there is no value in these bonds at their current (seemingly high) price.

If anyone knows more, do tell!

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