from Follow the Money

Putting the BRICs cash to work ….

June 23, 2007

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Foreign central banks custodial holdings at the New York Fed rose by close to $12b last week, with over $4b in Treasury purchases.   Combine that data point with the fall in Treasury yields, and it seems reasonable to conclude that foreign central banks found Treasuries more attractive at 5.2% than at $4.8 or 4.9%.   Anecdotes suggesting that central banks jumped back into the market early this week seem true.   

The trouble over at two Bear Stearns hedge funds (well chronicled by Naked Capitalism) also may have contributed to the fall in Treasury yields this week.

One thing seems clear: central banks still have a lot of cash to play with, cash that has to go somewhere.  Brazil has resumed releasing its reserves data in a timely way, so we now know Brazil's reserves increased by about $15b ($14.6b) in May.

If China added $38b to its reserves in May -- $38b is my estimate for the valuation-adjusted increase in China's April reserves -- then the BRICs added a record $95b to their reserves in May.  That is up from around $70b in March and a bit less than $80b in April (all data has been adjusted for valuation effects).

The BRICs are not the only emerging markets adding to their reserves at a rapid clip either.   Some small Latin countries are doing their part --as, for that matter, are many smaller Asian economies.  Thailand and Malaysia, I am thinking of you ...  

Global reserve growth likely far exceeded $100b in May.   Central banks have to be buying a lot of something.

The pace of reserve growth does seem to have slowed slightly in June.  The bond market turmoil in the US seems to have led some investors to scale back their investments in emerging economies, at least somewhat.   The pace of Russia's reserve growth has slowed noticeably in June.    Brazil though is still intervening -- its reserves are up $7-8b in the first three weeks of June.    That is a strong pace, even if its slightly off the record pace of May.    India continues to intervene as well: its reserves are growing by $1b to $1.5b a week. 

As for China, well, we don't know.   But it is safe to assume that it continues to add to its reserves at an impressive clip.   The Economist (still) isn't convinced the RMB is undervalued, but it is quite clear that the market only balances at the current price thanks to huge PBoC purchases. 

Not all these reserves flow into dollars.  Russia and India only keep around 50% of their reserves in dollars.  But China likely keeps a bit over 70% of its reserves in dollars -- and Brazil keeps an even higher fraction of its reserves in dollars.  

Not all these reserves flow into long-dated Treasuries and Agencies either, even in good times.   India prefers bank deposits to securities.   Russia for some reason holds short-dated Agencies rather than short-dated Treasuries.   it may be dabbling a bit with some longer-maturities, but the stabilization fund's guidelines suggest that it remains concentrated at the short-end.     Brazil though has been putting all its funds into Treasuries -- and not just into bills.   And then there is China.   It clearly has been putting a higher fraction of its reserves into Agencies.   Still, if your reserves are growing by around $40b a month, you don't have to put all your reserves into Treasuries to be a big buyer (in aggregate) of Treasuries.   

China's total reserve growth still year will clearly top the net issuance of Treasuries.   I suspect we may have gotten a taste of what might happen in the bond market if China really stopped buying over the past couple of weeks.   Just a guess though.   China clearly didn't sell.   But it does seem to have preferred bills to bonds when rates were rising ... 

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