Friday, May 11, 2007

. Federal Reserve: "Factors Affecting Reserve Balances", May 9

- Fed's Treasuries holdings: $776.6bn (-$9.2bn)
- Other central banks' Treasuries holdings: $1,228.0bn (+$0.7bn) (*)
- Other central banks' agency securities: $703.1bn (+$3.6bn) (*)
- Mackinlay's Global Dollar Liquidity Measure: $2,707.7bn (-$4.9bn)

(*) Off-balance-sheet items.

The week ends with a $4.9bn contraction in our Global Dollar Liquidity Measure. So far in 2007, this has happened on three occasions only. The main culprit: the Fed reverting a massive repo operation. Foreign central banks added about $4bn, mostly in agency securities. They now hold more than $700bn in agency bonds in custody at the New York Fed. Meanwhile, our Endogenous Liquidity Index did not fare any better (-0.94% on the week). While the carry trade factor remained unchanged, all other components dragged the index lower: CDS spreads, high-yield bond spreads, the VIX, and the Goldman Sachs share price.

The way I see it, the correction in risky assets that began yesterday could very well continue for some time. But I wouldn't get too excited with short positions: year-on-year growth rates (+13,95% for our Dollar Global Liquidity Measure) still suggest a heathy long-term liquidity situation.

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