New York, Feb 27: Federal Reserve chairman Alan Greenspan once again stressed that foreign central banks don't have the keys to the bond market's future in their hands. That's a view that seems to tilt against just about every bond trader's current sentiment. A wide range of market participants have argued for some time a chief reasons why the bond market has done so well in an environment where the economy is improving is because foreign central banks have been such aggressive purchasers of Treasury debt.
The foreign central banks, primarily the large holders of dollar reserves in Asia, are snatching up Treasurys in part because of trade imbalances between their nations and the US but it's also been a function of the dollar's long slide, and the attempt by these banks, led by the Bank of Japan on behalf of Japan's Finance Ministry, to turn that around by buying the dollar, which they then park in US Treasury.
It's a strategy that's left many worried that if the purchases were to wane, the relative stability in Treasury yields would evaporate quickly and push prices down, both at auctions and in secondary market trading. The dominance of the central banks was highlighted again on Wednesday, with indirect bidders which include these buyers - scooping up a whopping 43% of the two-year Treasury note auction, up from the recent average of 38%.
Greenspan, in testimony before the House Budget Committee that centered largely on the deficit, said in questioning that "there's no question that if there's a sale of foreign asset largely held by the central banks or the ministries of finance, that has an effect. But it's very small."
Echoing remarks made during his semiannual testimony to Congress earlier this month, the chairman pointed to the massive size of the government bond market and the "relatively modest" size of the foreign holdings. Greenspan also noted that much of the overseas buying falls in shorter maturities, where yields are dominated by the interest rate policies of the Fed. Bureau Report