Great Graphic: Central Banks Snap Up Treasuries

The Federal Reserve offers custodial services for foreign central banks. Precisely which countries use these services is confidential as is who patronizes a commercial bank’s services. 

There was a large draw down in the Treasuries the Fed holds for foreign officials beginning last September and running through mid-March. During this period the  Fed’s custody holdings of Treasuries fell from $3.024 trillion to $2.974 trillion (see the Great Graphic from Bloomberg below).

Understanding why they fell will help us appreciate why since the mid-March, custody holdings jumped to set a new record higher of $3.025 trillion in the week ending June 10. They slipped marginally in the week through June 17. New data will be released tomorrow. 

 

As the US dollar appreciated in Q3 and Q4 2014, foreign central banks intervened to smooth out the decline in their currency in order to minimize disruptions for economic agents and domestic markets. The “currency war” meme does not make sense of this: central banks spent about $50 bln defending their currencies from falling to far too fast. 

What happened in the middle of March? The dollar stopped falling. As it rose, some central banks rebuilt the reserves that they had drawn down. It took the central banks half the time to rebuild the reserves as to draw them down. 

There are several emerging market countries that are likely candidates. South Korea, Taiwan, India and Russia are reasonable suspects.  However, given the tension between the US and Russia, it would seem unreasonable that Russia would be using the Fed’s custody services.  

China’s reserve accumulation has slowed. The drop in oil prices reduces OPEC’s surplus by as much as $1 trillion and this will slow its reserve accumulation. Indeed there is potential that if oil prices do not recover much more in the coming months, some countries producers may have to tap their reserves to close a fiscal gap. The prospects are for reserve growth to slow going forward.