We wrote yesterday about Japanese retail and institutional investors exiting Freddie and Fannie holdings, and didn’t consider it as worrisome as it might seem on the surface, since at this juncture, the funding of our current account deficit is coming almost from central banks and to a lesser degree, sovereign wealth funds.
Tonight, the Financial Times reports in “Bank of China flees Fannie-Freddie,” that the Bank of China has cut its Freddie and Fannie positions. Although it went public in 2006, state entities still have majority control, and the bank is generally described as a state-owned bank. Thus one must wonder if the bank’s move is an early sign of changing official sentiment.
Doc Holiday commented yesterday that the low yields on Treasuries relative to inflation constituted a huge, largely unrecognized bubble. The FT provides a possible explanation. In the last month, foreign investors were sellers of Agencies and made much-larger-than-usual purchases of Treasuries.
From the Financial Times:
Bank of China has cut its portfolio of securities issued or guaranteed by troubled US mortgage financiers Fannie Mae and Freddie Mac by a quarter since the end of June.The sale by China’s fourth largest commercial bank, which reduced its holdings of so-called agency debt by $4.6bn, is a sign of nervousness among foreign buyers of Fannie and Freddie’s bonds and guaranteed securities.
Foreign investors have been a mainstay of the market for such debt, but uncertainty over the mortgage financiers’ capital positions and the timing and structure of a potential government rescue has made some investors reassess their exposures. Asian investors in particular have become net sellers of agency debt, said analysts.
Federal Reserve custody data shows that for the year to July, foreign official and private investors bought an average of $20bn of agency debt a month, including debt issued by other government agencies such as Ginnie Mae and the Federal Home Loan Banks. Purchases of US Treasuries averaged $9.25bn.
From July 16 to August 20, foreign investors sold $14.7bn of agency debt, trimming their overall holdings to $972bn. They purchased $71.1bn of Treasuries in the same period…..
This weekend, the Group of Twenty developed and advanced developing countries will be holding a preparatory meeting in Brazil. Although the crisis at Fannie Mae and Freddie Mac is not on the agenda, there is speculation that Treasury officials could informally encourage big holders of agency debt and mortgage-backed securities not to scale back their investments..
We’ll see in the next few weeks if the sales campaign succeeds.
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The Chinese are merchantilists, but even they will eventually figure out that the dollars they crave are an “asset” that keeps on taking – compounded negative interest. At some point, interest rates above 10%