Wednesday, January 26, 2005

After binging in November, foreign central banks are pushing away from the table today.

Shorter-dated US Treasury notes were weaker on Wednesday after disappointing demand at an auction of $24bn in two-year notes.

Bids reached 2 times the amount on offer, less than the recent average of 2.21 times. Indirect bidders, which include foreign central banks, took only 29.8 per cent, below 34 per cent at a December sale, and a recent average nearer 50 per cent.

Traders said expectations of interest rate rises in the months ahead weighed on appetite for the rate-sensitive paper.
This is consistent with foreign central banks' understandable dissatisfaction at the low rates they're earning on US treasuries. One strategy they've been pursuing of late is to move into higher-yielding dollar assets such as agency bonds and corporate bonds. Total foreign purchases of agency bonds rose 34% last year, and official purchases of corporate bonds doubled.

Another related move is to demand higher rates on T-bills. At 3.26%, the 2-year is now at its highest point since May 2002.

That which the East Asians want, stays cheap. That which they don't want, becomes dear.

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