Fed Custody Holdings Record Decline Fuels Russia Speculation
The record drop in U.S. government securities held in custody at the Federal Reserve is fueling speculation that Russia may have shifted its holdings out of the U.S. as Western nations threaten sanctions.
Treasuries held by foreign central banks dropped by $104 billion to $2.86 trillion in the week ending March 12, according to Fed data released yesterday, as the turmoil in Ukraine intensified. As of December, Russia held $138.6 billion of Treasuries, making it the ninth largest country holder. Russia’s holdings are about 1 percent of the $12.3 trillion in marketable Treasuries outstanding, according to data compiled by Bloomberg.
“The timing of the drop in custody holdings makes Russia a more likely suspect,” said Marc Chandler, global head of currency strategy in New York at Brown Brothers Harriman & Co. in a telephone interview. “If Russia did it, then they may have transferred the holdings to another bank outside of the U.S.”
Crimea is preparing for a March 16 referendum on splitting from Ukraine after Russia seized the peninsula. Secretary of State John Kerry warned Russia that the U.S. and Europe could take serious action after the referendum should there be no sign of a resolution to the Ukraine crisis.
Kerry, who told a Senate panel in Washington that “nobody doubts” Crimea will vote to leave Ukraine, met with Russian Foreign Minister Sergei Lavrov in London today.
“Escalating talk of sanctions over the Ukraine conflict would give it every reason to move those holdings to an off-shore custodian,” according to Wrightson ICAP, referring to Russia.
The previous biggest drop in Fed custody holdings was $32 billion in June after the central bank indicated they may reduce purchases of Treasuries. Andrea Priest, a spokeswoman for the Fed Bank of New York, declined to comment.
“How much more room it has to go depends on who’s doing the shift,” said Shyam Rajan, rates strategist in New York at Bank of America Corp. “It could just be a shift in where they hold Treasuries as opposed to outright selling. If they had sold we would have been much higher in yields this week. We’ve seen a rally.”
A spokeswoman for Russia’s central bank said it hasn’t disclosed changes in its foreign-asset holdings.
“Bank Rossii publishes data on managing foreign-currency assets not earlier than six months after the given period because of the high sensitivity of prices on global financial markets to the actions of largest market participants, including the Russian central bank,” Anna Granik, a spokeswoman for Moscow-based central bank, said in an e-mailed response to questions.
The decrease in custody holdings at the Fed spurred speculation Russia may have moved to raise funds to defend its currency as the turmoil worsens. The ruble has declined 10.3 percent against the dollar this year and reached a record low 36.9 per dollar on March 3. It declined 0.2 percent today to 36.6.
“If they were selling to defend the currency, the market would have felt the impact on yields more substantially,” said David Keeble, the New York-based head of fixed-income strategy at Credit Agricole SA.
Central banks at the end of last year may have been adding to their holdings in Europe, such as Belgium’s central bank. Belgium custodial holdings of Treasuries rose by 28 percent in December to $256.8 billion, according to Bloomberg data.
“A lot of people are looking at Belgium,” Keeble said, referring to shifts in foreign reserves.
Foreign holdings of Treasuries totaled a record $5.79 trillion at the end of last year, according to Treasury data released in February. Fed holdings for its own account were $2.2 trillion. The U.S. central bank has begun tapering its monthly purchases of Treasuries to $35 billion as it winds down monetary stimulus that was designed to help foster economic growth.
The 10-year note posted the biggest weekly gain in almost two years, with the yield dropping as much as 18 basis points. The yield was little changed today at 2.65 percent, according to Bloomberg Bond Trader prices.
“On the margin, it’s a net negative for the Treasury market because it’s a reminder that there’s a potential seller of Treasuries for non-monetary reasons,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “If the market believed they were going to do it, Treasury yields would not be at 2.65 percent.”
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