From: Jeff Danoff
Sent: Wednesday, February 07, 2007 11:22 AM
Subject: NY Fed Makes Sense Of Foreign Treasury Buying
DJ FED WATCH: NY Fed Makes Sense Of Foreign Treasury Buying

   By Michael S. Derby
  NEW YORK (Dow Jones)--Amid the current week's schedule of Treasury debt
auctions, one of the key factors keeping investors biting their nails is the
performance of a measure called the "indirect bid."
  Many dealers and investors consider this government measure, which they
understand to describe primarily foreign central bank and both domestic and
foreign institutional buying, as the make or break factor for a given auction's
success. If the indirect bidders show up in force, the sale will go well. If
they don't, well, the outlook darkens.
  Into the debate enters new research from the Federal Reserve Bank of New
York, which published two new studies Wednesday - one looking at the identities
of Treasury buyers at auctions and the other, unrelated, at a program that
allows the government to lend excess cash to banks for a rate set via auctions.
  The key study, entitled "Who Buys Treasury Securities at Auction?", finds
that Wall Street's conventional wisdom surrounding the "indirect bid" measure
is largely correct. Michael Fleming, the bank economist who wrote the study,
concludes the category is "a fairly good proxy," if an "imperfect" one, for
those trying to gauge buying by foreign investors.
  Unfortunately, Fleming's work is unable to break down this foreign buying
into its central bank or private sector origins. Thus, an important question
remains unanswered: how active are central banks in bidding at Treasury
auctions? The economist tied this shortfall to a lack of data from the
  The focus on the indirect bid factor also obscures the fact that primary
dealers, elite banks that do business directly with the Fed and underwrite
government debt auctions, still take up the lion's share of Treasury sales. And
in many cases, that inventory is then in part sold to the foreign accounts that
as of 2005 held 30% - or $1.3 trillion - of all outstanding marketable Treasury
debt, according to the study. Many of those buyers are central banks.
  Fleming notes that investors eligible to be indirect bidders come from a
diverse pool. The category counts non-primary dealers and brokers, private
retirement funds, along with the foreign buyers. In the data that are
available, Fleming found that 46% of average indirect bid at a Treasury sale
can be tied to foreign buyers. As for the remainder of indirect bidders,
investment funds average 32%, while non-primary dealer banks bring up the rear
at 18%. What's left over can be attributed to other types of investors. The
analyst warned, however, that "average allocations vary substantially across
  Fleming's report found that Treasury data show that in all manner of
government debt auctions, the primary dealer community represents the lion's
share of buying. The government releases two series of data detailing the
auction buying, and according to the "bidder" data primary dealers on average
buy 70.9% of publicly available Treasurys, while "investor" class data show
those same dealers gobble up an average of 75.4% of publicly available
government debt.
  The second study found that Treasury does obtain market rates under its
excess cash lending program, known as the Term Investment Option program.
  (Michael S. Derby, a special writer with Dow Jones Newswires, has covered the
Federal Reserve since 2001. He also writes about bond markets and the economy.)
  -Michael S. Derby, Dow Jones Newswires; 201-938-4192;
  (END) Dow Jones Newswires
  02-07-07 1216ET
Copyright (c) 2007 Dow Jones & Company, Inc.
DJ info: 1043,4043
2007-02-07 17:16:32 UTC