Foreign Central Banks Do Not Trust The US Government

There's some very interesting cross trends in central bank investing, which clearly indicate foreign central banks do not accept the word of the Treasury that they will back-up agency paper, such as Fannie Mae and Freddie Mac paper.

As Brad Setser points out:

In the first three weeks of October, the latest New York Fed custodial data indicates Central banks have added $53.9b to their Treasury holdings while reducing their Agency holdings by $51.4b. Since September 3 – roughly the time when the Treasury announced it would recapitalize the Agencies as needed – central banks have added $130.2b to their Treasury holdings while reducing their Agency holdings by $40.7 billion.

This has to be some type of cultural "lost in translation" problem, since my guess is that it would be hard to find a US money manager who does not believe that the Treasury doesn't stand ready to buy every single piece of agency paper, if it has to.

This, of course, is a positive for US investors looking for a safe, higher yielding alternative to Treasury securities. Agencies are all paying at least 100 basis points higher.

There is also a BIG question: What else is lot in translation with foreign central banks and what are the possible financial implications down the road, if any? A scary question in the current environment.