Rebuilding Reserves Means U-Turn on Treasuries: Southeast AsiaShamim Adam and Lilian Karunungan
Southeast Asian central banks are rebuilding their foreign-currency reserves, raising the prospect they will boost holdings of U.S. Treasuries for the first time since February.
Singapore, Thailand, Indonesia, Malaysia and the Philippines reported increases of about 1 percent to 3 percent in their international foreign-exchange holdings in September from the previous month, paring the combined decline this year to 2.6 percent. Monetary authorities in Asia are among the most aggressive sellers of U.S. debt in 2013 as Malaysia, Thailand and Singapore each reduced ownership by between 20 percent and 28 percent through August, data compiled by Bloomberg show.
Policy makers may resume Treasury purchases in the coming months as reserves rise, said Todd Elmer, head of Group-of-10 strategy for Asia ex-Japan at Citigroup Inc. in Singapore. Asian exchange rates rebounded in October after the Federal Reserve unexpectedly maintained stimulus last month, helping revive overseas investment and lessening the need for central banks to intervene to support their currencies.
“Shifts in Treasury holdings are more reflective of ups and downs in reserves holdings, more so than changes in appetite,” Elmer said in an Oct. 23 e-mail interview. “Investors are responding to expectations for delayed Fed tapering, with expansive liquidity arguing for dollar depreciation and inflows into Asian currencies.”
Singapore, Thailand, Malaysia and the Philippines cut their U.S. debt holdings by a total of 26 percent to a combined $172 billion in the six months to the end of August, U.S. Treasury Department data show.
Some Asian central banks had drawn on their foreign-exchange reserves to rein in losses in their currencies this year. Those declines were partly triggered by the Fed’s signal on May 22 that it may reduce its $85 billion a month of bond purchases. Prior to the unexpected delay in tapering on Sept. 18, all of Southeast Asia’s most-active currencies had slumped in 2013, led by Indonesia’s rupiah and the Philippine peso.
Fortunes have since reversed, with the rupiah and Malaysia’s ringgit leading a rally over the past month with gains of 3.3 percent and 2.4 percent, respectively. Equities in emerging Asia attracted about $2 billion of investment in the week ended Oct. 23, more than double the inflows the previous week, according to Australia & New Zealand Banking Group Ltd., citing data from U.S.-based research firm EPFR Global.
The reserves of the 12 biggest developing countries, excluding China and those with managed currencies such as Saudi Arabia, rose by $38 billion since the start of September to $2.93 trillion, data compiled by Bloomberg show.
“Given that reserves are building up again, I would expect there to be some renewed buying” of Treasuries by Asian central banks, Citigroup’s Elmer said. “Even if there is a desire to reduce the proportion of U.S. dollar holdings in their portfolios, this will probably only come with marginal shifts over a long period of time.”
Asian monetary authorities seeking to buy Treasuries are facing lower returns. Ten-year U.S. notes yielded 2.50 percent in Asia today, down from 2.85 percent on Sept. 17 before the Fed announced it would stick with its debt-purchase program. That’s up from 2.04 percent on May 22.
Treasuries returned 0.7 percent this month through Oct. 29, limiting the loss for 2013 to 1.7 percent, according to data compiled by Bloomberg. That compares with a 2 percent gain for all of 2012. The Bloomberg USD Emerging Market Sovereign Bond Index climbed 2.9 percent this month and is down 4.4 percent this year.
Chua Hak Bin, an economist at Bank of America Corp. in Singapore, said Southeast Asian central banks may still reduce their holdings of Treasuries, with many more comfortable investing in investment-grade bonds of their regional counterparts.
A U.S. government shutdown ended this month after Congress agreed to raise the debt ceiling and avoid a default amid wrangling among political parties over the nation’s finances. The Fed will now delay a reduction in bond purchases until March, according to the median estimate of 40 economists surveyed by Bloomberg, compared with a December prediction previously.
“The recent U.S. fiscal debacle has shaken confidence on the status of the dollar as the predominant reserve currency,” Chua said in an Oct. 24 e-mail interview. “Southeast Asian central banks are diversifying their reserve holdings and reducing the concentration risk in U.S. Treasuries.”
The Philippines is diversifying its reserves, central bank Deputy Governor Diwa Guinigundo told lawmakers in Manila on Oct. 21. Governor Amando Tetangco said in a text message to Bloomberg two days later that a benchmark it uses to manage reserves includes Treasuries and other government bonds.
The Monetary Authority of Singapore’s reserve holdings are “diversified across a basket of currencies and assets, which include U.S. Treasuries,” according to a central bank e-mail sent on Oct. 11. Singapore’s official foreign reserves of $268 billion at the end of September, compared with $259.3 billion at the end of 2012, MAS said.
Thailand’s foreign-exchange reserves climbed 2.4 percent in September from a month earlier to $163 billion, while the Philippines holdings advanced 0.7 percent to $83.5 billion, central bank figures shows. Indonesia’s reserves rose 2.9 percent to $95.7 billion, according to data compiled by Bloomberg, and in Malaysia they increased 1.1 percent to $132 billion, according to the International Monetary Fund.
“In the case of Singapore, given that their reserves have risen this year, their reduction of U.S. Treasury holdings reflects an active decision to reduce their reserve exposure to the U.S.,” Khoon Goh, a senior currency strategist at Australia & New Zealand Banking in Singapore, said in an Oct. 23 e-mail.
Singapore held about $79.4 billion of U.S. Treasuries as of end-August, a 27 percent drop from a record $109.5 billion in February, U.S. Treasury Department data show. Thailand lowered its holdings by 25 percent in the first eight months of 2013 to $40.1 billion, while Malaysia’s fell 28 percent to $13.9 billion.
The Bloomberg-JPMorgan Asia Dollar Index, which tracks the region’s 10 most-active currencies excluding the yen, is headed for a second monthly gain before the U.S. Treasury Department issues September data for foreign debt holdings on Nov. 18. The gauge climbed 1 percent, building on a 1.3 percent rally in September that ended four months of losses.
While efforts to boost reserves may leave Southeast Asian central banks with little choice other than to buy U.S. dollars again, the scale may be different, said Sacha Tihanyi, senior currency strategist at Scotiabank in Hong Kong.
“They are essentially forced to be U.S. dollar buyers given the dynamics of managing large foreign-exchange reserves,” Tihanyi said in an Oct. 23 e-mail interview. “They are going to have to be buying U.S. dollars to some degree; however, it may be to a lesser degree than in previous periods of build, given the debt-limit concern.”