WEEKLY FED BALANCE SHEET REVIEW. FUNDING LIQUIDITY IS UP (BUT WHO CARES?)
. Federal Reserve: "Factors Affecting Reserve Balances", July 25

- Fed's Treasuries holdings: $778.1bn (-$3.6bn)
- Other central banks' Treasuries holdings: $1,253.3bn (+$1.8bn) (*)
- Other central banks' agency securities: $749.7bn (+$5.2bn) (*)
- Mackinlay's Global Dollar Liquidity Measure: $2,781.0bn (+$3.4n)

(*) Off-balance-sheet items.
agustin_mackinlay@yahoo.com
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Foreign central banks continue to buy Treasury and agency securities: they added a further $7bn to their accounts. Meanwhile, the renewed inversion of the yield curve means that the 5.25% Fed funds rate is likely to take its toll on domestic liquidity conditions (-$3.6bn). All in all, "funding" liquidity remains strong, with the annual rate of growth of our preferred measure at a 30-month high (+15.7%). But who cares about funding liquidity anyway? All the action is in "market" liquidity.

Here, the meltdown is taking epic proportions. Our still preliminary Endogenous Liquidity Index is down 21%! All major components are weak: CDS and other credit spreads, volatility measures, and measures of financial innovation. Still, the Moody's Baa spread (the key spread in my long-term models) is unchanged vs. July 2006. Am I missing something here?