Central banks with lots of reserves have not been running away from the dollar. But they do seem to be running away from any dollar asset with a hint of risk. Right now, it is hard not to focus on the relentless slide of the stock market (the FT is calling this week a global crash), the enormous daily moves in the foreign exchange market or oil’s sharp slide. But New York Fed’s latest custodial data is stunning in its own way.
Since September 10, central banks have added close to $100 billion to their custodial holdings of Treasuries. Custodial holdings of Treasuries reached $1537.6b on Wednesday — up from $1513.1b last Wednesday, and up from $1438.1b on September 10.
Some of the increase in Treasury holdings is explained by a slight fall in Agency holdings — which fell from $956.6b on September 10 to $944.8b on October 8. But the roughly $8b fall in Agency holdings cannot explain the huge increase in Treasury holdings.
Solid data on global reserve growth in September doesn’t yet exist – China and Saudi Arabia matter, and they don’t release data quickly. But the reserves of nearly every country that reports data quickly fell in September. I have no doubt that the Fed’s custodial holdings are increasing far more rapidly than global reserves.
That either means that:
a) Central banks are shifting from euros to the dollar, adding to their dollar holdings;
b) Central banks reserve managers have also lost confidence in the international banking system — and in money market funds — and are moving into the safest dollar asset around.
I would bet that this is more a flight away from risky dollar assets toward Treasuries than a flight into the dollar.
Central bank reserve managers are scared. Understandably so. Central bank reserve managers’ primary goal is to avoid losing money — and to have all the liquid assets their country needs. Right now that means holding Treasuries and not much else.
But their actions also aren’t making the Fed’s job any easier.
There isn’t a shortage of demand for US Treasuries right now. There is by contrast a shortage of institutions willing to lend in dollars to a host of banks — or cut into the Treasury-Agency spread by selling Treasuries and buying Agencies. A year ago central banks couldn’t get enough Agencies. Now they won’t touch them, even though they are far better substitutes for Treasuries now than they were then.
UPDATE: Kuwait’s sovereign fund is gearing up to support the local market, which likely means that it is building up its liquid holdings abroad. I am also fairly sure that Norway’s fund isn’t the only fund in the unfortunate position of having lost a lot of money over the past year. Saudi Arabia’s fairly conservative portfolio almost certainly has outperformed Kuwait’s portfolio, or Abu Dhabi’s portfolio. A lot of oil funds invested a lot of money at what now looks to be the peak of a host of different markets. Hat tip: SWF Radar.