from Follow the Money

At least we know who will finance the US fiscal stimulus …

January 26, 2008

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Monetary Policy

Last week, central banks added $12.14b to their Treasury holdings at the New York Fed (and perhaps more to other accounts -- the New York Fed’s custodial holdings are an imperfect measure of the central bank demand), and $11.96b to their Agency holdings. The week before they added $7.13b to their Treasury holdings, and $7.30b to their Agency holdings.*

That works out to an increase of $38.5b in foreign central banks’ Treasury and Agency holdings at the New York Fed over a two week period -- or about as much as sovereign funds have spent buying stakes in US banks over the past two months.

If central banks keep adding around $10b to their Treasury portfolio a week, the US will need to increase the size of the stimulus to meet central bank demand. Perhaps the second round of stimulus will be better targeted. And if central banks keep snapping up $10b of Agencies a week, the GSEs will have no trouble raising the funds needed to buy up a ton of jumbo mortgages. That also provides a form of targetted relief, just to slightly different group.

More seriously, the rise in central bank’s holdings of Treasuries and Agencies highlights something I alluded to earlier in the week -- the bifurcation of sovereign demand between the some of the world’s safest assets (if you ignore currency risk) and some of the world’s riskiest assets.

Some central banks likely have decided that this isn’t the time to dabble in the asset-backed security market, or in the equity market.

And some sovereign funds seem to have decided that this is the perfect time to buy into their bankers, brokers and money managers.

* I used the change in the average level of central bank holdings, rather than the change in central bank holdings at the end of the reporting week for this calculation. Using the data for the close of business on Wednesday paints a slightly different picture.

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