Survey: Central Banks Will Intervene In All Markets

Wednesday, June 14, 2006

Housing bubble? Don't worry. Almost 90 central banks are ready to intervene. Reuters has this report on a survey done by UBS that concludes that central banks will diversify from US government into MBS (mortgage backed securities) and other collateralized bonds. The notion that central banks also plan to buy shares and corporate bonds sends a shudder down my spine. This is outright market manipulation. Printing money to buy whatever ailing investment class in order to keep prices "stable" is a far cry from the free market gospel central banks love to so lavishly soothe the public with.
From the Reuters report:
Central banks are planning to diversify foreign exchange reserves away from U.S. government debt into higher-yielding assets, including mortgage bonds, through 2007, according to a UBS Securities survey.
Almost all of the 90 central banks polled by the unit of the world's biggest wealth manager now have the authority to spend reserves on bonds other than Treasury debt, the poll found. Just 3 percent said they only invest in Treasuries, down from 31 percent four years ago, it said.
Problems with agency bonds will also go away is the vain hope in the temples of fiat money. Historically the plan to print one's way out of problems has never worked but only delayed the inevitable.
"Sixty-one percent said they plan to purchase more bonds with higher yields, led by mortgage- and other asset-backed securities, and so-called agency debt of government-sponsored enterprises such as Fannie Mae the recent poll said.
The survey's results "suggest that central banks are moving more aggressively into spread product," UBS mortgage analysts led by Laurie Goodman in New York said in a report on Tuesday."
One in five central banks plans to decrease its dollar-denominated holdings, the report said. I wonder whether gold is a "dollar investment."
"About $2.7 trillion of the $4.3 trillion in foreign exchange reserves are in dollar assets. The percentage should remain constant this year, the analysts said.
"With the large build-up in reserves over the past decade, far more than is required to meet liquidity needs, central banks have become increasingly focused on maximizing the long-term return, while controlling risk," the analysts said. That favors MBS since their potential to outperform Treasuries increases the longer they are held, they said.
21% of the banks said they would boost purchases of the securities backed by monthly payments on U.S. home loans. Sixteen percent said they would buy more agency debt; 14 percent plan to purchase asset-backed securities; 12 percent intend to buy covered bonds, or European debt secured by mortgages; and 8 percent said they want more gold and Treasury inflation-indexed securities.
Corporate bonds and stocks rounded out planned central bank portfolio additions at 5 percent and 4 percent, respectively, the survey said."
Welcome to the new world of securities buyers with a printing press in the backroom.
Some more data from the report.
"Six percent of central banks said they would reduce holdings of agency bonds and 5 percent expect to cut back on Treasuries, it added.
Growth of reserves outside the United States is especially strong at Asian central banks, which UBS estimates will average $30 billion a month. Seven of eight of the largest holders of foreign exchange are in Asia, led by China and Japan, the UBS analysts said.
For MBS, the reallocation of the existing foreign exchange reserves as central banks make their portfolios more closely match benchmark indexes could push $82 billion a year into the bonds, they said. Another $34 billion a year from reserves accumulated in Asia would bring the total of new MBS purchases to $116 billion, or 58 percent of expected new supply in 2006.
Foreign holdings of MBS in the last year have already increased to $259 billion from $176 billion, UBS said, citing Treasury data. Official holdings, including central banks, nearly tripled to $66 billion from $23 billion.
In addition to Asia, UBS also said it expects "big reserve accumulation" in the oil-exporting countries."
I am kinda shell-shocked from such news.

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