If Money Isn't Flowing to Agencies, Where Is It Going?

by: John Jansen

I wrote a piece yesterday about the diminished bid for agency paper in the Central Bank Community. Brad Setser posed the pertinent question and wanted to know where the money that was not being spent in agencies was being invested. I spoke with several Treasury market veterans (a small sample of four, I will confess) but each is perched in a seat which permits them to offer an informed opinion.

One trader who specializes in the Treasury bill market notes that bill supply has become very large and the prospect is that it will increase going forward. He notes that Treasury bills, in spite of the supply glut, trade superbly and he has observed some of this money flow into the bill sector.

He also mentioned that the indirect bids in recent bill auctions have climbed higher. In the last three weeks, two of those weekly six month bill auctions have seen indirect bids of nearly 44 percent. (Indirect bids for the uninitiated are a proxy for central bank interest.) I arbitrarily chose three auctions of six month bills in April of this year and the indirect bids averaged about 28 percent in those weeks.

The bill trader noted that some clients now have restrictions on the amount of agency discount notes which they can hold and that has caused funds to flow to bills, too.

One senior salesman with whom I spoke noted that central bank clients, in his opinion , are shackled by their liquidity requirements and that forces them to buy Treasury debt.

Central banks often play in the supra sovereign market. KFW,EIB World Bank and Inter American Development Bank are names which populate that space. The problem is that there is not enough size here for the central banks. If one of these entities does a $1billion deal the $100 million or $200 million that a central bank can buy will have very little impact on their much larger portfolio.

The bottom line is that the preponderance of the central bank money seems to have moved to the Treasury market as it is the quickest and most efficient place to invest large chunks of money quickly and anonymously.

As I finish this ,and I do not know how to get the answer to this one, I note that my limited sample of players has a great view of center court in the Treasury market. But to the extent that some of this money is moving to real estaate in Japan or gold or some other non Treasury vehicle, I am not capturing that flow here.

That will require more legwork to figure out.

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