Russia to Brazil Intervention Adds to U.S. Debt Distress
Investors suffering the worst losses in Treasuries since at least 1978 can add dollar sales by emerging-market central banks to their list of challenges.
Speculation that the Federal Reserve, the biggest buyer of Treasuries, will reduce its purchases sent U.S. debt down 4.1 percent this year and boosted the dollar against developing-nation currencies for four straight months, matching the longest streak since 2001, according to Bloomberg data. India, Brazil, Russia and Indonesia have intervened in foreign-exchange markets, and dollar sales mean liquidating Treasuries, according to bond traders at Scotiabank and Bank of America Corp.
While the $48 billion drop in foreign central bank holdings at the Fed since a record in June is less than half of the $113 billion in withdrawals from U.S. bond funds in the past three months, they mark a change in trend. Foreign ownership of Treasuries fell 0.6 percent in the first half of 2013, poised for the first full-year decline in data going back to 2000 and a departure from the 10 percent annual gains seen since 2006.
“There is a lack of buyers in the Treasury market,” Ali Jalai, a Singapore-based trader at Scotiabank, a unit of Canada’s Bank of Nova Scotia, said in a telephone interview Sept. 4. “Selling by central banks to back up their currencies exacerbates the situation.”
Developing country currencies are tumbling amid capital flight from their equity and bond markets because the Fed plans to reduce stimulus that has debased the dollar. The JPMorgan Emerging Markets Currency Index has plunged 9.1 since April, and its four-month drop through August hasn’t been exceeded since a 10-month losing streak in 2001.
While weaker exchange rates typically make a country’s exports more competitive, the speed of the decline for nations like India and Indonesia threatens to increase inflation and discourages investment, according to Westpac Banking Corp.
More than $47 billion has left funds investing in emerging markets since May, with this year’s net outflow standing at $7.5 billion, according to Cambridge, Massachusetts-based research company EPFR Global. Withdrawals in the seven days through Aug. 28 were the highest in two months, with records for Mexico and Philippine equity funds, EPFR said Aug. 30.
“Countries are happy to have a weaker currency so long as it’s not generating a lot of inflation and undermining confidence in the currency itself,” Sean Callow, a Sydney-based senior currency strategist at Westpac, said in a Sept. 6 phone interview. “For nations like India and Indonesia, it will only amplify their inflation concerns while Korea, for instance, would be happy to have a slightly weaker currency.”
Brazil, which has reserves of $372 billion, announced a $60 billion program on Aug. 22 to stem a decline in the real, which is down 11 percent in 2013. The nation owned $253.7 billion in Treasuries on June 30, down from $257.9 billion at the end of the first quarter. The central bank is offering the equivalent of $2 billion of foreign-exchange swaps each week and $1 billion of dollar loans under a plan scheduled to run through the end of the year.
Central bank president Alexandre Tombini said on Aug. 31 he’s ready to provide liquidity and that the nation has a “cushion” of reserves. The real has risen 3.4 percent since the program was announced as Brazil’s benchmark equity index climbed 7.5 percent.
The press department of Brazil’s central bank declined via e-mail to comment on its Treasury holdings.
The Reserve Bank of India announced a plan last month to sell dollars to the nation’s biggest state-run oil importers as the rupee fell to a record low of 68.845 against the U.S. currency. While its Treasury holdings have climbed 2.9 percent this year to $61.2 billion, growth is slowing after a 37 percent surge in 2012. The RBI didn’t respond to e-mailed questions about its U.S. debt holdings.
Indonesia intervened to support the rupiah, which fell 14 percent since the end of June as the current-account deficit widened 69 percent to a record in the second quarter from the first. The nation sold about $2.5 billion of Treasury bonds in the second quarter, official data show. Bank Indonesia Deputy Governor Perry Warjiyo told reporters in Jakarta Sept. 6 he can’t disclose the composition of currency reserves.
Russia’s Bank Rossii manages the ruble exchange rate against a dollar-euro basket and has intervened since May to stem the currency’s slide. The central bank has sold 378.74 billion rubles ($11.4 billion) of foreign currency this quarter as of Sept. 3. Russia’s Treasury holdings fell 9.8 percent last quarter to $138 billion on June 30. A central bank spokesman, who asked not to be named citing official policy, declined to comment on the sales.
Foreign reserves of the 12 biggest emerging markets, excluding China and countries with currencies whose values don’t change freely, have fallen about 2 percent this year, data compiled by Bloomberg show. That’s the most since the 11 percent slump after the collapse of Lehman Brothers Holdings Inc. five years ago this week.
“A large proportion of the central bank reserves go to the fixed-income markets,” Bin Gao, the head of interest-rate research for Asia and the Pacific at Bank of America in Hong Kong, said by telephone on Aug. 28. “When FX reserves drop, they need to sell some of their bonds. It’s hurting Treasuries already.”
Foreigners sold $124 billion of Treasuries in the three months ended June 30. Brazil, Taiwan and Russia reduced their stakes by a combined $22 billion.
The biggest cut came from Thailand’s sale of $18.2 billion, or 27 percent of its total holdings. The Bank of Thailand didn’t respond to e-mailed questions and Deputy Governor Pongpen Ruengvirayudh declined to comment on central bank policy in Bangkok Sept. 3.
“Emerging-market central banks will be under intense pressures to defend their currencies by selling their underlying Treasury holdings,” Stephen Jen, the London-based co-founder of hedge fund SLJ Macro Partners LLP, said in a Sept. 4 e-mail. “There could be a negative spiral between pressures on emerging markets and the U.S. Treasuries, through the emerging-market central banks’ reserves.”
Yields (USGG10YR) on 10-year notes touched 3 percent last week for the first time since July 2011. They retreated to close at 2.93 percent on Sept. 6 after data showed the U.S. economy added 169,000 jobs in August, fewer than forecast. The Labor Department report did little to derail speculation the Fed may announce a reduction in bond-buying at its Sept. 17-18 meeting.
The yield was 2.88 percent as of 9:20 a.m. in New York.
Treasuries lost 4.1 percent this year, as measured by the Bank of America Merrill Lynch U.S. Treasury Index, poised for the biggest annual decline since the index started in 1978.
Group of 20 countries meeting in St. Petersburg, Russia, on Sept. 6 repeated their concern that a shift in Fed policy may prove damaging to global markets.
“We reiterate that excess volatility of financial flows and disorderly movements in exchange rates can have adverse implications for economic and financial stability, as observed recently in some emerging markets,” according to a communique released at the gathering.
Fed officials in Jackson Hole, Wyoming, last month rebuffed calls to take the possible effect of tapering on emerging-market currencies into account before they act.
Yields on 10-year Treasury notes will be 3 percent by the middle of 2014 and 3.2 percent by the end of that year, according to median analyst forecasts compiled by Bloomberg. That’s less than the average of 3.54 percent over the past decade.
Currency reserves globally have still risen 3 percent this year, and the increase will blunt the effects of dollar sales, said Hideo Shimomura, the chief fund investor who helps oversee about $61.3 billion at Mitsubishi UFJ Asset Management Co.
“Some countries will have to sell Treasuries, but it hasn’t had a big impact on the market so far,” Tokyo-based Shimomura said by phone on Aug. 29.
Worldwide reserve assets rose to a record $11.2 trillion last month, an endorsement of the dollar as the world’s primary currency. The greenback is “dominant,” and was on one side of 87 percent of all foreign-exchange trades in April, according to a report last week from the Bank for International Settlements in Basel, Switzerland.
Fed Chairman Ben S. Bernanke’s June 19 statement that the central bank might start reducing its bond purchases this year and end them in 2014 if the economy continued to improve sent 10-year yields rising from 2.35 percent at the time.
The Fed will trim its $85 billion in monthly purchases of Treasuries and mortgage bonds by $10 billion at its next meeting Sept. 17-18, according to the median prediction of 34 economists in a Bloomberg survey last week. The central bank surpassed China to become the biggest owner of Treasuries in 2011, and its holdings totaled a record $2.03 trillion last week.
China owns $1.28 trillion in U.S. debt. The world’s second biggest economy cut its Treasury holdings by 1.7 percent in June, the most since 2011, though it increased its stake by 4.5 percent in the first half.
China’s State Administration of Foreign Exchange, which oversees the nation’s reserves, didn’t respond to a Sept. 2 faxed request for comment from Bloomberg News.
Japan pared its holdings by 2.5 percent to $1.1 trillion in the first half, the Treasury Department data show. Investors in the nation purchased a net 2.64 trillion yen ($26.5 billion) of Treasuries in July, the Ministry of Finance reported today.
A reduction for all of 2013 would be the first in six years. The nation’s central bank has doubled monthly purchases of Japanese government bonds as policy makers seek to break a cycle of deflation and currency strength that has strangled growth for almost two decades.
“The buyers of American Treasuries are going to be American private-sector investors going forward to a greater degree,” Kit Juckes, global strategist at Societe Generale SA, whose U.S. unit is a primary dealer, told Bloomberg Television on Sept. 2. “Tapering is an exercise now in price discovery. What is the clearing price for U.S. government securities when the biggest buyers are walking away?”
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