May 27, 2011
There was one truly interesting observation in this week’s Fed balance sheet update: not that the actual balance sheet hit a new all time record (which it did at $2.779 trillion), or that the Fed added another $24 billion in Treasurys to its balance sheet, or that total reserves hit a new all time record, increasing by $53 billion to $1.59 trillion. No. The biggest surprise was that in the just ended week, Treasury securities held in custodial accounts at the Fed, considered by some the best real-time representation of foreign holdings of US Treasurys considering that the TIC update is not only wildly inaccurate in its monthly update, but is also 3 months delayed, dropped by the largest amount in 4 years. From a total of $2.704 trillion, USTs held in custodial accounts declined by $18.7 billion to $2.685 billion. This is the second largest decline in history, only topped by the $22.1 billion in the week of August 15, 2007 which is the week that followed the great quant crash of 2007 that wiped out, among others, Goldman Alpha. This observation is in stark contrast to the recent record strength of bond issuance, after both the 5 and 7 Years auctions posted record Bid to Cover investor interest.
One explanation is that while foreign investors are aggressively buying up the belly of the curve, they are even more aggressively selling the other parts of the curve, namely both the short (sub 2 Year) and the Long (10-30 Year). Another explanation is that the weekly change in Custodial data is largely noise and has no bearing on total foreign holdings of debt, which however we would largely discount. Another question is whether the large outflow from bonds is a consequences to recent market volatility, or is the basis for one: i.e., will the money be used to purchase stocks, or, if as China is posturing, is this merely capital leaving the US and entering Europe. Lastly, the nearly $20 billion in USDs likely will have to be converted to another FX denomination: should any notably USD weakness be observed in the next several days, this could well be a reason.
A chart of total Custodial Treasury holdings:
And old faithful: the neverending weekly “record” Fed balance sheet chart:
This article was posted: Friday, May 27, 2011 at 7:45 am