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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: gregor_us who wrote (63779)	6/15/2006 10:27:32 AM
From: redfrecknj	Read Replies (2) \| Respond to of 110194

This is not your mom and pops Central Banks anymore. This is a whole new world. UBS Securities via Reuters "...central banks will diversify from US government into MBS (mortgage backed securities) and other collateralized bonds." and "Corporate bonds and stocks... and "moving more aggressively into spread product..." NEW YORK, June 14 (Reuters) - Central banks are planning to diversify foreign exchange reserves away from U.S. government debt into higher-yielding assets, including mortgage bonds, through 2007, according to a UBS Securities survey. Almost all of the 90 central banks polled by the unit of the world's biggest wealth manager now have the authority to spend reserves on bonds other than Treasury debt, the poll found. Just 3 percent said they only invest in Treasuries, down from 31 percent four years ago, it said. Sixty-one percent said they plan to purchase more bonds with higher yields, led by mortgage- and other asset-backed securities, and so-called agency debt of government-sponsored enterprises such as Fannie Mae <FNM.N> the recent poll said. The survey's results "suggest that central banks are moving more aggressively into spread product," UBS mortgage analysts led by Laurie Goodman in New York said in a report on Tuesday. Parent UBS AG <UBSN.VX> is based in Zurich. Rising trade surpluses with the United States have filled foreign central bank coffers with dollars. Inverstor concerns that central banks will begin to look outside U.S. borders for investments were reinforced slightly, with 18 percent of the banks planning to cut dollar assets outright, the poll said. Fourteen percent will increase assets denominated in the U.S. currency, it said. About $2.7 trillion of the $4.3 trillion in foreign exchange reserves are in dollar assets. The percentage should remain constant this year, the analysts said. "With the large build-up in reserves over the past decade, far more than is required to meet liquidity needs, central banks have become increasingly focused on maximizing the long-term return, while controlling risk," the analysts said. That favors MBS since their potential to outperform Treasuries increases the longer they are held, they said. Twenty-one percent of the banks said they would boost purchases of the securities backed by monthly payments on U.S. home loans. Sixteen percent said they would buy more agency debt; 14 percent plan to purchase asset-backed securities; 12 percent intend to buy covered bonds, or European debt secured by mortgages; and 8 percent said they want more gold and Treasury inflation-indexed securities. Corporate bonds and stocks rounded out planned central bank portfolio additions at 5 percent and 4 percent, respectively, the survey said. Six percent of central banks said they would reduce holdings of agency bonds and 5 percent expect to cut back on Treasuries, it added. Growth of reserves outside the United States is especially strong at Asian central banks, which UBS estimates will average $30 billion a month. Seven of eight of the largest holders of foreign exchange are in Asia, led by China and Japan, the UBS analysts said. For MBS, the reallocation of the existing foreign exchange reserves as central banks make their portfolios more closely match benchmark indexes could push $82 billion a year into the bonds, they said. Another $34 billion a year from reserves accumulated in Asia would bring the total of new MBS purchases to $116 billion, or 58 percent of expected new supply in 2006. Foreign holdings of MBS in the last year have already increased to $259 billion from $176 billion, UBS said, citing Treasury data. Official holdings, including central banks, nearly tripled to $66 billion from $23 billion. In addition to Asia, UBS also said it expects "big reserve accumulation" in the oil-exporting countries.