| NEW YORK
NEW YORK Jan 30 Foreign central banks slashed
their holdings of U.S. debt stored at the Federal Reserve by the
most in seven months during the past week, leaving these
so-called custody holdings at the lowest level since November,
Fed data released Thursday showed.
The drop, the sixth weekly outflow in a row, comes against a
backdrop of enormous volatility in foreign exchange markets,
particularly in emerging market currencies. This has forced a
number of central banks to spend from their reserves to defend
their currencies against excessive weakness.
"It makes sense," said Scott Carmack, fixed income portfolio
manager at Leader Capital in Portland, Oregon, which has $1
billion under management. "It will probably continue as emerging
markets try to prop up their currencies."
Overall foreign holdings of securities such as Treasuries,
mortgage-backed securities and agency debt at the Fed fell by
$20.77 billion to $3.325 trillion in the week ended Wednesday,
led by a $20.66 billion drop in Treasury holdings. It was the
largest weekly decline for both since June.
Foreign central bank holdings of Treasuries at the Fed
totaled $2.973 trillion.
Both Treasury and overall holdings were the lowest since
mid-November and have fallen for six straight weeks, ever since
the Fed's monetary policy arm, the Federal Open Market
Committee, announced on Dec. 18 that it would begin scaling back
its massive bond-buying program known as quantitative easing.
Total holdings have fallen by nearly $55 billion from a
record $3.38 trillion on the week that ended when the Fed made
its announcement. Treasuries account for some $48 billion of
that total decline.
On Wednesday, the FOMC said it would reduce its purchases of
Treasuries and debt backed by Fannie Mae and Freddie Mac by
another $10 billion per month starting in February, bringing the
monthly run rate of purchases down to $65 billion. Before it
began tapering the program, it had been buying $85 billion a
month, and the Fed's balance sheet has swollen to more than $4
Through its purchases of safe assets like Treasuries, which
drove U.S. bond yields to record lows, the Fed has essentially
forced investors to seek higher yields elsewhere, in other
assets such as stocks and in other regions. Emerging markets
became a favorite destination for these so-called hot-money
With the Fed now reducing its stimulus, those flows have
dramatically reversed in recent months, picking up significant
momentum in the last week, and leading to fierce bouts of
In response, several emerging market central banks executed
extraordinary interest rate hikes this week in an effort to stem
the selling of their currencies. Turkey, for instance, raised
its key overnight lending rate to 12 percent from 7.75 percent,
and South Africa and India also lifted rates sharply.
"They can generally do this in one of two ways," Carmack
said. "The hardest but most effective way is to raise interest
rates as they did in Turkey and India. That's obviously a growth
negative and in the near term causes pain. Central banks often
will take the easier path of liquidating dollar reserves to buy
back their own currencies to prop them up."