Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

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Still growing …

by Brad Setser
August 1, 2009

The Fed’s custodial holdings of Treasuries just topped $2 trillion. Custodial holdings of Treasuries rose by $25 billion in July. The overall pace of growth in the Fed’s custodial holdings did slow a bit in July, as some of the rise in Treasuries was offset by a fall in Agency holdings. But in a world where the US trade deficit is running at about $30 billion a month, a $15 billion monthly increase in the Fed’s custodial holdings is significant.

I understand why the Treasury market is so focused on Chinese demand — China is a the largest player in the market, and a major shift in Chinese demand would almost certainly have an impact. Right now, the market is obsessing over the low level of indirect bids in last week’s 2 year auction. At the same time, concern that central banks are abandoning Treasuries should be muted so long as the rise in the Fed’s custodial holdings of Treasuries is running far above the US trade deficit. Barring a huge increase in the trade deficit after May, that is certainly will be case over the last three months of data.


It is also true on a 12m basis.


The Fed’s custodial holdings may exaggerate central bank purchases a bit, as central banks sought safety in the crisis and moved funds out of private accounts. But so long as the custodial holdings of Treasuries are rising so rapidly, it is a little hard to argue that central bank reserve managers aren’t willing to hold dollars.

Central banks simply aren’t going to finance the entire fiscal deficit anymore. Not with the trade deficit so much smaller than the fiscal deficit. That’s a change. But in a lot of ways it is a healthy change: It is a sign that the US trade deficit is falling and the world is adjusting to a lower level of US consumption.


  • Posted by yoda

    the next shoe to drop -> ARM Treasury (aka T-Bill). Everyone is crowd into ARM Treasury thinking it is a safehaven, while Obama+Cracy gov, FED, and Treasury is racking up debt in ARM Treasury (which they know they cant pay back). This can only mean two things, much higher tax for everyone or FED start printing dollar to pay off these ARM Treasury -> dollar devaluation. ARM Treasury is next subprime gov origination by shadow Obama gov.

  • Posted by yoda

    the only way to keep GDP from dropping is social welfare. where they gonna raise the money for further extension of unemployment benefits? two choice, higher tax for everyone (penalize who works hard) or originating more ARM Treasury (T-Bill) which will need to be paid in higher tax or printing more dollar.

  • Posted by yoda

    all those ARM Treasury holders is really gonna get seriously violated for their money in toxic ARM Treasury. China’s reserve is gonna take serious hit unless they diversify off ARM Treasury and dollar. ARM Treasury and dollar NOT SAFEHAVEN AT ALL.

  • Posted by Cedric Regula


    Shouldn’t we also graph total monthly treasury debt totals and add that to the graph of Fed custodial holdings.

    That is a moving gear and at least as important as the monthly trade deficit. The trade deficit gives China the funds to buy new issues of course, but they can do the flow in reverse, and so too can domestic buyers.

    But it would give us a picture of who is winning the market share battle to be the largest holders of treasuries, domestic or foreign buyers.

    I’ll even give my vote to add that to a list of things that would qualify as Geoeconomic Risk, so you could kill two birds with one stone, and get a brownie point from your boss too!

  • Posted by don

    The trade deficit is running at about the same level as the growth in foreign official holdings. This is equal to an aggregate demand de-stimulus that is bigger than the federal fiscal stimulus. Time to discourage foreign countries from this competitive devaluation strategy.

  • Posted by Trade Show Graphics

    Thanks for the news update