Mea Culpa

We all make mistakes. One of the benefits of blogging is that when you make one, you tend to have it pointed out to you. A couple of days ago, Macro Man ran a chart purporting to show the close relationship between the Fed custody holdings for foreign central banks and the trajectory of the S&P 500. The chart generated a fair amount of comment in the comments section of the post, in Macro Man's email box, and elsewhere in the blogosphere. The substance of this comment was "that's not right."

So Macro Man went back and checked...and it turns out it wasn't right. Mea culpa. One of the problems with following so many self-calculated indicators is that you sometimes forget which is which. Thursday's chart showed total central bank Agency and Treasury holdings at the Fed- both for the Fed's own account and on behalf of foreign central banks. Obviously, the alphabet soup of measures taken by the Federal Reserve have reduced its holding of Treasuries on its balance sheet, thereby exerting a negative influence on the indicator in the published chart.

However, the substance of Macro Man's point still stands; Voldemort and friends have stepped down their pace of US bond buying over the past few quarters. The chart below shows the y/y change in Fed custody holdings of Agencies and Treasuries on behalf of foreign CBs; as you can see, the pace has moderated since the onset of the crisis, and remains well below the levels of 2003-04 when the Japanese were among the serial interveners.
So while Voldemort is still taking the piss, it does seem to be the case that he's no longer providing maximum liquidity to US markets at a time when such liquidity might come in handy. After all, who wants a lousy 2 year note when you can buy an oil company instead?
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