Monday, November 26, 2007

. Federal Reserve: "Factors Affecting Reserve Balances", November 21

- Fed's Treasuries holdings: $792.6bn (+$5.2bn)
- Other central banks' Treasuries holdings: $1,223.3bn (-$11.2bn) (*)
- Other central banks' agency securities: $802.5 (+$8.2bn) (*)
- Global Dollar Liquidity Measure: $2,818.6bn (+$2.2bn)

(*) Off-balance-sheet items

Will funding liquidity come to the rescue of market liquidity? Our Endogenous Liquidity Index managed to post a solid 2.4% gain on Friday thanks to both falling CDS spreads and to the rather lame VIX. Yet, the index is still perilously close to its August 16 low. Bulls hope that funding or macroeconomic liquidity will come to its rescue. But November has failed to deliver on that front. The weekly Fed balance sheet shows a meagre $2.2bn gain in our Global Dollar Liquidity measure, as Treasuries sales by foreign CBs are partly compensated by agency securities purchases. All in all, the increase leaves much to be desired, because the volume of repos continues to surge — which only serves to highlight the sense of fragility in money markets. The bottom line is: funding liquidity is failing to rescue its wounded cousin, a.k.a. market liquidity.


t said...

Do you think that rising funding liquidity and falling market liquidity is broadly speaking inflationary?

Agustin said...

Good question, and not an easy one. To the best of my knowledge, there are very few precedents. Maybe the "stagflation" crowd is on to something here. Let me look back at the numbers ...

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