from Follow the Money

Look who is supporting the mortgage market …

December 29, 2004

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No Surprise: the People’s Bank of China. The PBOC has shifted from buying treasuries (03) to buying mortgage backed securities (04).

From Reuters: "Make no bones about it, mortgages really went global in 2004," said Arthur Frank, director of MBS research at Nomura Securities International. "Overseas investors had dollars to put to work and MBS were their vehicle of choice, offering them an attractive pick-up in yield over Treasuries .... "Foreign demand has certainly climbed over the years, but it picked up rapidly this year," said Frank.

Net foreign purchases of MBS were $242 billion in mid-2004, up $19 billion from year-end 2003 and $35 billion more than 2002, according to Inside MBS & ABS, a publication of Inside Mortgage Finance. While data is not available yet for the second half of 2004, most analysts believe foreign investment in MBS gained even more momentum during that period.

The strong performance of the $4.5 trillion MBS market in 2004 can partly be attributed to buying from Asian portfolios and China’s central bank in particular, according to Steven Abrahams, fixed income mortgage strategist at Bear Stearns.

"U.S. dollar portfolios in Asia have made themselves felt this year in the U.S. rates markets, and perhaps in no sector more than MBS," he said in recent research.

The Chinese central bank’s demand for mortgages is partly due to the climbing balance of dollars it has for investment. China’s reserves for the year ending in August grew by $131 billion, second only to Japan’s $272 billion increase, according to the International Monetary Fund. China’s reserves now stand at around $501 billion, while Japan’s are at $827 billion." End Reuters.

Since the PBOC’s reserve accumulation likely surged in q4 2004, the amount of Chinese support for the mortgage market probably accelerated in the second half the year. China’s reserves are almost certainly closer to $600 billion than $500 billion now ...

You might say the recent surge in housing prices was made in China ... like many other gifts exchanged in the past few days.

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