from Follow the Money

FRBNY custodial holdings of Agencies still falling, but at a slower pace

September 11, 2008

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The latest data from the Fed’s custodial accounts (money that the Fed holds for foreign central banks) is out. It indicates that the central banks reduced their holdings of Agencies from $958.6b last Wednesday to $956.6b with Wednesday -- a much slower pace of fall than in recent weeks. Treasury holdings rose from $1436.8 to $1438.1b.

This incidentally is a case where it is important to look at the data for the close of business on Wednesday (reported in the last column) rather than the data showing average holdings over the preceding week, or the change in average holdings. The fall in the average is larger than the fall in the data showing holdings this Wednesday v holdings last Wednesday.

The slight fall in the overall custodial holdings over the last two weeks also suggests a slowdown in global reserve growth, not just a shift from Agencies to Treasuries.

Foreign central bank’s custodial holdings of Agencies seem to have peaked at $985.9b on July 16. Since then, the central banks holdings of Agencies have fallen by $19.4b, and central banks holdings of Treasuries have increased by $74.9b.

The New York Times oped page thinks that this fall contributed to the Treasury’s decision to take over the Agencies.

"The need for an explicit bailout underlines the economic vulnerabilities of the United States. In July, Congress gave Treasury Secretary Henry Paulson unlimited authority to pay the debts of Fannie and Freddie and to shore up their capital, if need be. Yet investors the world over continued to doubt the companies’ viability, shunning their securities or demanding unusually high interest rates on loans. In effect, investors deemed the government’s commitment to Fannie and Freddie as either insufficient or not credible — an extraordinary vote of no confidence that, in the end, led to the bailout ...

The United States must acknowledge that its deep indebtedness is especially dangerous in times of economic crisis. The level and stability of American interest rates and of the dollar are now dependent on the willingness of foreign central banks and other overseas investors to continue lending to the United States. The bailout became inevitable when central banks in Asia and Russia began to curtail their purchases of the companies’ debt, pushing up mortgage rates and deepening the economic downturn.

The oped page of the Journal seems (unusually) to agree: " reassuring the Chinese and other holders of Fannie senior debt is the main point of this bailout." (via uber-blogger Felix Salmon)

I do too. As does Tim Duy.

Central banks didn’t have to stop buying US assets to exercise a bit of influence over US policy, only change what they bought. In this case, I suspect the Treasury would ultimately have had to step in no matter what, as US commercial banks hold an awful lot of Agencies too. At the same time, central banks’ unwillingness to add to their Agency holdings (unlike say PIMCO) likely contributed to the Treasury’s timing.

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