World Events and the Bible (Source: WSJ) – The value of U.S. government bonds held by foreign central banks at the Federal Reserve shrank by a record amount this week, causing a stir in the Treasury market.
Treasury securities held in custody for foreign official and international accounts dropped by $105 billion in the week that ended Wednesday, according to the latest weekly data published by the Fed. That decline brought the current figure to $2.855 trillion, a 15-month low.
The drop is ten times bigger than the average weekly change since the start of 2013, according to Nomura Securities International.
It wasn’t clear what caused the decrease—that information isn’t disclosed by the Fed. But some strategists, traders and other market experts have put forward theories tying Russia to the move. The world’s eighth-biggest holder of Treasurys outside the U.S. may have shifted the securities to offshore accounts protected from the threat of sanctions, these experts say. Russia could also have sold some Treasurys to prop up its currency, some surmise.
A spokesman for the New York Fed declined to comment. Russian officials couldn’t immediately be reached for comment.
“This is only speculation on our part, but it seems likely that the Russian authorities had more than $100 billion of Treasury debt in custody at the Fed, and it doesn’t seem implausible that they moved it to a jurisdiction where it would be less vulnerable to a U.S. asset freeze,” said Lou Crandall, chief economist at Wrightson ICAP LLC.
U.S. officials in recent days have warned that Russia could face economic sanctions following Sunday’s referendum in Crimea, in which voters will be asked if they want to join Russia or stay a part of Ukraine. Western and Ukrainian government officials say that Russia’s involvement in Crimea is unacceptable and that the vote is illegitimate.
“The upcoming referendum in Crimea and multiple threats of sanctions could have triggered a significant reallocation of Treasurys to non-U.S. custodians,” said Shyam Rajan, interest rate strategist at Bank of America BAC -2.10% Merrill Lynch in New York.
Some traders took the bond market’s recent strength as a sign that foreign central banks merely transferred their bonds to different accounts, rather than selling them. In the time period corresponding to the latest weekly data, Treasury yields inched higher, from 2.71% to 2.73%, as prices fell only slightly. On Friday, the benchmark 10-year note yielded 2.645%.
“If central banks were selling that much Treasurys, the market would have noticed and would not have traded as well as it has this week,” said Anthony Cronin, a Treasury bond trader atSociété Générale SA GLE.FR -2.19% .
Treasurys, a popular haven investment among money managers, in recent days have rallied amid escalating tensions in Ukraine and soft economic data out of China.
Russian entities held $138.6 billion of Treasury debt as of Dec. 31, including both official and private holdings, according to the Treasury Department’s website.
China, the biggest foreign holder of Treasurys, had $1.269 trillion, according to the website. No. 2 Japan held $1.183 trillion. Taken together, China and Japan account for 21% of foreign holdings. Russia accounts for 1%.
The Fed began publishing details on U.S. government debt holdings, including information on foreign central-bank holdings parked with the Fed, in June 1996.
Services offered by custodian banks often include account administration, settlement confirmation and other duties that ensure the safety of others’ holdings. While foreign central banks could keep their holdings with any bank that offers these services, there’s some advantage to dealing with the Fed, traders said.
“It’s likely cheaper for the central banks than having other, commercial custodian banks hold the positions on their behalf,” Mr. Cronin said. “If [Russia’s central bank] did transfer these assets out of the Fed, they could have gone to Russian banks or any other offshore bank that provides custodian services.”
Some analysts said central banks other than Russia’s could be selling Treasurys to prop up their local currencies. Many emerging-market currencies fell sharply in January as concerns grew about the health of developing economies.
Foreign central banks’ holdings of Treasury debt at the Fed have fallen by $141.5 billion since the start of the year, following an increase of $103.5 billion during 2013, according to Jeffrey Young, U.S. rates strategist at Nomura Securities International in New York.
Foreign central banks started to trim holdings from record highs following the Fed’s Dec. 18 decision to dial back monthly bond purchases that were a cornerstone of its post-financial-crisis stimulus program. That program had helped support the bond market. – WSJ: Big Drop in Foreigners’ Treasury Holdings at Fed Stirs Talk
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