"This is like deja vu all over again."
-Yogi Berra
Another month, another European central bank Thursday. While neither the ECB nor the BOE is expected to move policy, the ancillary information provided with the announcments will provide valuable insight into what the world's central banks are thinking.
The BOE may be a total non-event; after all, they usually don't issue a statement when they leave rates unchanged. But after yesterday's measures aimed at calming the money markets, the BOE may perhaps be tempted into clarifying the steps that it means to take.
More interesting, of course, will be the ECB press conference. At last, M. Trichet has been hoist on the petard (incidentally, what is a petard?) of his own word games, as the September tightening "promised" last month is unlikely to materialize. Perhaps Trichet will maintain that the ECB is vigilant both on inflation and on the proper functioning of money markets! Reardless, here's hoping that a journo or two asks probing questions on the severity of the current cash squeeze and its potential impact on the real economy.
Speaking of which, last night's Beige Book had a little something for everyone. While admitting to the continued severity of the residential housing recession, the survey nevertheless suggested that economic ouput continues to expand at a moderate (2% handle) to modest (1% handle) pace. Moreover, the survey suggested that while motor vehicle sales were sluggish (was it the CIA buying all those GM sedans?) , non-residential construction remains robust and that the economy continues to add jobs. However, inflation got short shrift. So if they want to cut rates, they can point to housing and inflation. If they don't, they can point to the lack of contagion. All in all, pretty neutral (or indeed beige!)
Elsewhere, Macro Man is left wondering why Rupert Murdoch enjoys such a dismal reputation as a press magnate. Even The Sun comes across as a bastion of even-handed, measured analysis compared to some of the rubbish coming out of the Daily Telegraph recently. After last month's story on China's potential pursuit of a 'nuclear' sale of US Treasuries, the Torygraph follows up this morning with a story suggesting that China is selling Treasuries.
As proof, the author points to the Fed's custody data, which does indeed demonstrate a decline in holdings of Treasuries since late July. Of course, what the article ignores is that holdings of Agencies continue to rise apace; indeed, even before the recent drawdown in Treasury holdings, CB Agency holdings had been rising at a faster pace this year. If China were going to sell off its US bondholdings, why sell Treasuries but not Agencies?
Moreover, if a Big Kahuna like China started to whack the Treasury market, don't you think word would leak out? Or if SAFE really did sell $45 billion in Treasury bonds, wouldn't the price have gone down/yield gone up? In point of fact, the entire yield curve shifted lower between the date of the peak in Fed custody holdings of Treasuries and the latest datapoint. And Macro Man has yet to hear word one of Chinese Treasury sales. If SAFE really is dumping bonds, they've managed to do so in an incredibly quiet fashion-and silence hasn't exactly been a hallmark of SAFE's investment activities over the past few years.
So what is going on with Treasuries, then? Why has the Fed's custody holding gone down? Macro Man believes that his original theory remains correct. As he articulated in comments on Brad Setser's blog (though he cannot remember which thread), and alluded to in this space, his view, based on conversations with people close to SAFE, was that China had been focusing for a while on buying Treasury bills and other short-dated paper. The rationale was to let that paper mature, and then take the cash and give it to CIC. 
-Yogi Berra
Another month, another European central bank Thursday. While neither the ECB nor the BOE is expected to move policy, the ancillary information provided with the announcments will provide valuable insight into what the world's central banks are thinking.
The BOE may be a total non-event; after all, they usually don't issue a statement when they leave rates unchanged. But after yesterday's measures aimed at calming the money markets, the BOE may perhaps be tempted into clarifying the steps that it means to take.
More interesting, of course, will be the ECB press conference. At last, M. Trichet has been hoist on the petard (incidentally, what is a petard?) of his own word games, as the September tightening "promised" last month is unlikely to materialize. Perhaps Trichet will maintain that the ECB is vigilant both on inflation and on the proper functioning of money markets! Reardless, here's hoping that a journo or two asks probing questions on the severity of the current cash squeeze and its potential impact on the real economy.
Speaking of which, last night's Beige Book had a little something for everyone. While admitting to the continued severity of the residential housing recession, the survey nevertheless suggested that economic ouput continues to expand at a moderate (2% handle) to modest (1% handle) pace. Moreover, the survey suggested that while motor vehicle sales were sluggish (was it the CIA buying all those GM sedans?) , non-residential construction remains robust and that the economy continues to add jobs. However, inflation got short shrift. So if they want to cut rates, they can point to housing and inflation. If they don't, they can point to the lack of contagion. All in all, pretty neutral (or indeed beige!)
Elsewhere, Macro Man is left wondering why Rupert Murdoch enjoys such a dismal reputation as a press magnate. Even The Sun comes across as a bastion of even-handed, measured analysis compared to some of the rubbish coming out of the Daily Telegraph recently. After last month's story on China's potential pursuit of a 'nuclear' sale of US Treasuries, the Torygraph follows up this morning with a story suggesting that China is selling Treasuries.
As proof, the author points to the Fed's custody data, which does indeed demonstrate a decline in holdings of Treasuries since late July. Of course, what the article ignores is that holdings of Agencies continue to rise apace; indeed, even before the recent drawdown in Treasury holdings, CB Agency holdings had been rising at a faster pace this year. If China were going to sell off its US bondholdings, why sell Treasuries but not Agencies?
Moreover, if a Big Kahuna like China started to whack the Treasury market, don't you think word would leak out? Or if SAFE really did sell $45 billion in Treasury bonds, wouldn't the price have gone down/yield gone up? In point of fact, the entire yield curve shifted lower between the date of the peak in Fed custody holdings of Treasuries and the latest datapoint. And Macro Man has yet to hear word one of Chinese Treasury sales. If SAFE really is dumping bonds, they've managed to do so in an incredibly quiet fashion-and silence hasn't exactly been a hallmark of SAFE's investment activities over the past few years.
So what is going on with Treasuries, then? Why has the Fed's custody holding gone down? Macro Man believes that his original theory remains correct. As he articulated in comments on Brad Setser's blog (though he cannot remember which thread), and alluded to in this space, his view, based on conversations with people close to SAFE, was that China had been focusing for a while on buying Treasury bills and other short-dated paper. The rationale was to let that paper mature, and then take the cash and give it to CIC. Well, guess what? Word from China is that CIC will officially come into being in a few weeks' time and with it the initial bond placement. This in turn will entail SAFE turning over a bunch of cash to CIC. Is it any wonder that this may be occuring at the same time as some of SAFE's Treasury bills are maturing?
And even if Macro Man is wrong and China has been selling some Teasury bonds on the sly, it hasn't exactly had a deleterious impact on the Treasury market or the dollar, has it? These guys aren't as stupid as the panic-mongers would have you believe, and they aren't going to steamroll the market and submarine their own (vast) holdings in the process.
Either way, it looks very much to Macro Man like the drawdown in Treasury holdings is almost certainly related to the official formation of CIC rather than any nefarious, Dr. Evil (or indeed Voldemort) -like plot to undermine US financial markets. And whatever the ultimate outcome for the dollar, he cannot see how this development represents anything like "new news."
Perhaps Wall Street Journal subscribers should thank their lucky stars that it was Murdoch, rather than the Barclay brothers, who bought Dow Jones....
9 comments
Click here for commentsApparently a Petard was some kind of bomb used in post-middle ages warfare. Google tells me. It means "blown up by your own bomb".
ReplyHoist on his own petard...Caught in his own trap. The petard was a conical instrument used in war filled with gunpowder. Used to blow open gates. Engineers would light the fuse and run. Presumably sometimes not quick enough. See "Hamlet"..."tis sport to have engineers hoist with his own petar."
ReplyDonald Last
Macro Man: in times of uncertainty, demand for Treasuries from private investors dwarfs sales by central banks. In other words, China can be selling aggressively AND yields on Treasury securities can fall at the same time. Cheers, Agustin.
ReplyBut why would they sell Teasuries but not Agencies? And why wouldn't anyoen have seen it or spoken about it, particularly in light of the previous Torygraph article?
ReplyColour me unconvinced.
also note the Treasuries piling up in the US in the TIC data. In the past, the survey has led those treasuries to be reallocated toward China and the Gulf, but more China than the Gulf.
ReplyMoreover, China has an inflow of $40b or so a month, and i don't think that has changed in August. The core question SAFE still faces is what to buy, not what to sell.
For what it is worth, i have steered journalists who have asked away from the China is selling story for those reasons.
bsetser
Are we looking at the same data? The following is the information on custody holdings. August 29: $1,979,353 bn (treasuries + agencies); August 1: $2,009,950 bn. In other words, a decline of $30.6 bn. Not bad!
ReplyAgustin, I saw $227 bio of net decline in custody holdings from July 27 to August 31.
ReplyIs that incompatible with bill holdings rolling off, especially in a month that sees the quarterly refunding (and hence a lot of maturities?)
What about the repatriation (as opposed to the reinvestment) of coupons paid during the month? Would that be captured in this data, Brad?
ECB says markets nervous, and uncertain, like high strung girl on her first date. Says flowers and chocolates can only get you so far....
ReplyAhh the joys of young love!
I also see a more like a $30b fall in total custodial holdings in the FRBNY data over the past 4-5 weeks. that is still a big shift from a trend of strong growth.
Replyand i meant "UK" not "US" holdings in my earlier comments. UK holdings of treasuries go up through June in the historical data, then get revised down -- and reallocated to other buyers