[Jason_Lim]

Conventional wisdom is that high indirect bidding in Treasury auctions should be a USD plus because it reflects high international demand for USD assets despite low yields and concerns over the policy stance.

Consider the alternative explanation. High indirect bidding reflects reluctant buying by foreign central banks that have no liquid alternative to the Treasury market in which to hold their increasing reserves. It tells us is that if central banks have to hold USD, they need a big liquid asset market in which to hold them.

We know that central banks are the big buyers -- between the two last benchmarks (June 2007- June 2008), foreign central banks accounted for about 75% of buying of USD assets.

The foreign private sector appears to have limited interest in US assets because of concern on the policy mix, low fixed income yields, and middle of the pack equity market. This leaves the central banks as the reluctant USD buyers of last resort. In effect, the large indirect participation in the auction may be telling us that central banks keep accumulating Treasuries because they keep accumulating reserves. There is no other asset market that can swallow so many dollars. But the real news is that the global private sector does not want to buy dollar assets, not that CBs are buying Treasuries, and the implication is USD negative, not positive.