Foreign Central Banks Slowed Purchases of Treasuries 7 Weeks Ago

02-10-2010 • HousingDoom.com

It is not clear whether China’s motive is simple risk aversion in the wake of a sharp widening of corporate and mortgage spreads during the past two weeks, or whether there also is a political dimension. With the expected termination of the Federal Reserve’s special facility to purchase mortgage-backed securities next month, some asset-backed spreads already have blown out, and the Chinese institutions may simply be trying to get out of the way of a widening. There is some speculation that China’s action has to do with the recent deterioration of US-Chinese relations over arm sales to Taiwan and other issues. That would be an unusual action for the Chinese to take–Beijing does not mix investment and strategic policy–and would be hard to substantiate in any event. In any case, all the more reason for Doomers to follow the weekly NY Fed H.4.1 updates and the progress of this little yellow line … The disturbing recent feature is a sudden pause in upward momentum from last December 16th. Foreign central banks simply haven't been adding to their holdings of treasuries for the last 7 weeks (we'll learn about the 8th week around 4:30 PM ET tomorrow3 afternoon). I don't know of a precipitating event which caused this, but I will hazard a guess that this line was much on the minds of the cenbank types who were huddling in a secret location near Sydney Australia last weekend.