Foreign central banks dump cash at Fed
China, Japan and other overseas central banks are leaving more of their dollars with the US Federal Reserve as they have liquidated their US Treasuries holdings to raise cash in an effort to stabilize their currencies, government data show.
Foreign central banks' reduced ownership of US government debt, especially older issues, have bloated the bond inventories of US primary dealers and kept US money market rates elevated in recent months, analysts said. Primary dealers, or the top 22 Wall Street firms that do business directly with the Fed, held $113.5 billion worth of Treasuries in the week ended Feb. 10, the most since October 2013.
As Wall Street holds more Treasuries, foreign central banks have piled more money into the Fed's reverse purchase program where they earn interest income.
"They have been selling their Treasuries holdings and using more the Fed's reverse repo program," Alex Roever, head of US interest rate strategy at J.P. Morgan Securities in New York, said on Monday. On Feb. 17, overseas central banks held $246.65 billion in reverse repos, up from $129.78 billion a year earlier, Fed data released last week showed.
Foreign official institutions including central banks sold a net $48.1 billion in long-dated US Treasuries in December, which was a record in monthly sales, according to the Wall Fargo Securities economists. Overseas government sales of Treasuries came as China and other export-driven economies have dug into their currency reserves to stem capital flights as oil and commodity prices have plummeted.
They could reinvest back into US securities whenever jitters about the global markets fade and oil prices find footing after hitting a 12-year low earlier this month, analysts said. "It's a place where they could park their cash for a period of time until they decide what they want to do with it, but I don't think it's a permanent destination," J.P. Morgan's Roever said.