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		Home Page News You Can Use Foreign central banks crowd out US bond investors Friday February 20, 11:29 am ET By Richard Leong and Lynn Adler NEW YORK, Feb 20 (Reuters) - Foreign central banks flush with U.S. dollars are pumping them into ultra-safe U.S. Treasury and agency debt, crowding out domestic investors and forcing them to pay higher prices and take on riskier debt. This rush to buy U.S. assets with dollars amassed during currency market intervention has kept U.S. bond yields at historical lows. The banks aim to offset their currencies' rise against the dollar to protect their exports. "They bid up the prices of Treasuries and agencies, and push down their yields (to levels) that are not attractive to us," said Eugene Flood, president at Smith Breeden Associates in Chapel Hill, North Carolina, which manages $11.5 billion. Pinched by this competition from overseas, some U.S. money managers are pouring money into riskier debt like corporate and mortgage-backed securities to earn extra interest income. "When people are underinvested, they're going to go out to a riskier part of the credit spectrum in order to get their yield," said Andy Brenner, head of institutional fixed income at Investec US. On the other hand, heavy foreign bids for U.S. assets help the U.S. economy. They finance the voracious U.S. appetite for overseas goods and services and keep interest rates low. "It's been a restraining force on rises in rates," said Robert Auwaerter, head of fixed-income portfolio management at The Vanguard Group Inc. in Valley Forge, Pennsylvania, which oversees $241 billion in bonds. The Federal Reserve said on Thursday its combined holdings of Treasury and agency debt for central banks abroad swelled to an all-time high at $1.142 trillion, an increase of $174.1 billion, or 14 percent, from late September. Since the September G7 meeting in Dubai, the dollar has declined about 6 percent against the yen(JPY=) and 10 percent against the euro(EUR=). The dollar's fall against the yen has been gentler than against the euro, partly because of Japan's hefty yen-weakening interventions to brake the dollar's fall against the Japanese currency. HEAVY FOREIGN PRESENCE If foreign central banks were not buying up so much U.S. Treasury debt, there would be ample supply to meet normal demand. The U.S. government has been borrowing heavily to close a budget gap projected to hit $521 billion in 2004. Indirect bidders, which include foreign central banks, accounted for 45 percent of the orders of the Treasury's $56 billion refunding last week. Those indirect bids were the highest since the Treasury started releasing the data in May 2003. "You think you have these large auctions ... In reality these auctions are a lot smaller than what they look like on the surface," Investec's Brenner said, referring to the amount of debt available to U.S. bidders. Foreign central banks have loomed over recent sales of new debt by the U.S. government, and government-sponsored enterprises like Fannie Mae and Freddie Mac (), whose bonds are deemed only a tad riskier than Treasuries. STRATEGIC RISKS "We tilted our positions more toward spread products," said Smith Breeden's Flood. His firm has underweighted Treasuries and agency securities versus portfolio benchmarks like the widely followed Lehman Brothers aggregate bond index. Loading up on riskier bonds is a gamble, but a reasonable one. The economy has shown flashes of growth and the Federal Reserve has assured the market that it will be "patient" in raising short-term rates. Since last year, prices of high-grade corporate bonds and mortgage-backed securities have risen as investors have flocked into higher-yielding sectors. This may eventually push investors into even higher-risk assets than they would otherwise select. "They're probably going to have to go further (on the risk spectrum), because high-grade corporates just don't yield enough," Investec's Brenner said. (With contributions from John Parry)   Back to Original Article: News You Can Use   Continue with: Consumer Prices Rise 0.5 Percent in Jan. Private Bush Meeting Gets Blogged Average Mortgage Rates Fall Japanese Govt. Says Economy Recovering Dollar Fights Back After Recent Drubbing Parents face tough choice on savings Stocks expected to open higher Oil Slips After Hitting $36 U.S. mortgage bonds slip after January CPI rise Greenspan Urges Care on Employment Issue
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