Re: [A-List] RE: 30-year Treasuries, Fed policy and the 2001-? recession: resp onse to Paul and Henry

[WRC92@xxxxxxx]

Not sure if anyone else spotted this article last Friday, but I found it interesting...

http://biz.yahoo.com/rf/030718/markets_agencies_2.html

'ECB selling US agencies, market whipsawed'

Friday July 18, 4:03 pm ET
By Nancy Leinfuss

NEW YORK, July 18 (Reuters) - The European Central
Bank and or some of its member national central banks
were selling U.S. agency debt on Friday, market
sources said, forcing yield spreads to widen
significantly in an already jittery market, traders
said. Spreads later improved as investor buying kicked
in, traders said.

"This morning we have indeed seen selling by ECB
banks," the trader said, noting sales totaled "several
hundred million dollars." He added that the flows were
"definitely higher than usual," and that there was
also some buying of agencies by domestic accounts.

The ECB selling added to the accounting- and
regulation-related woes of U.S. agencies Fannie Mae
and Freddie Mac that have rocked the agency market for
the last several weeks.

Rumors that the ECB may encourage its member banks to
limit their holdings of Fannie Mae or Freddie Mac debt
and may be looking to unload some its own supply of
U.S. agency debt ran rampant through the market,
traders said.

A federal probe of Freddie Mac's accounting practices
and restatement of earnings was launched last month.
Several members of Congress have called for more
regulation of the housing finance giants.

"The ECB rumors blindsided the market," said one
agency analyst. "Spreads sure blew out this morning
but later improved; however, the risks remain toward
widening," he said.

"It's been a very skittish market lately. It's traded
on vapor a lot this week. Any kind of rumor or
unsubstantiated allegation spooks the market," the
analyst said.

The European Central Bank declined to comment on the
rumors. A spokesman said he was aware of the market
developments.

"We do not comment on markets or rumors," he added.
Spreads on agency debt widened in the morning by as
much as 5 to 6 basis points, then erased some of the
weakness as buyers came in, traders said. This type of
widening of spreads is unusual for this asset class,
traders noted.

"There's been some decent buying of agencies at the
wides and spreads have come in but they still remain
weaker overall," an agency trader said.

Traders said the largest concentration of Friday's
selling took place in maturities under 10-years,
specifically among two to three-year securities.

Some traders said Asian central banks were among other
sellers of agency debt overnight, while another said
some bids were garnered out of Europe.

SHALLOW POOL

Traders were unsure how big the ECB's holdings were,
leading to uncertainty over how much more selling it
might have to do.

Dealers noted the ECB has limited foreign reserves
donated by its member banks. At the end of June, this
pool amounted to 39.17 billion euros in total, with
31.41 billion of that in foreign currency reserves.

One investor said the market believes agency debt is
being sold from this pool and agencies are not a big
allocation within the internal investment pool.

"There is a symbolic impact" to this selling, said one
investor, who pointed out the market fears such a
limit on agency holdings would be imposed on member
banks. "They might increase the risk weighting out to
member banks (of the ECB)."

The national central banks of the euro zone hold
323.07 billion euros of reserves, with 172.14 billion
of the total in foreign currencies.