Global market turbulence has caused foreign central banks to cut back holdings of U.S. agency and mortgage-backed securities and Treasuries, according to media reports on Tuesday.
Last week, data from the Federal Reserve indicated that foreign central banks had reduced holdings of agency debt and MBS at the Fed to their lowest level since early May ($285.21 billion), according to a report from Reuters. It was the sixth straight week the foreign central banks had reduced their holdings with the U.S. central bank. Last week, they experienced their largest decline ($10 billion) in more than three years.
The foreign central banks' recent sales of U.S. agency MBS and Treasuries may have been prompted by a weakening Chinese economy and fears over a federal funds target rate increase by the Fed later in the year, according to the report. Reaction from Fed policy makers on the recent U.S. stock market turbulence has been mixed; while New York Fed President Bill Dudley stated last week that a rake hike now seems “less compelling” after recent stock market declines, St. Louis Fed President James Bullard has said that the U.S. central bank is in “good shape” to raise rates and that the chances of such an increase are greater than 50 percent – and that the recent stock market volatility does not change that outlook.
It is speculated among some traders that worries over a weakening global economy are driving the recent sales of U.S. Treasuries by foreign central banks that are trying to defend their currencies in anticipation of the outflow of private capital; such declines in currency would make the importing of goods such as oil and food more expensive.
While some traders speculated the weakening global economy drove the foreign banks' shedding of U.S. Treasuries and mortgage-backed securities (namely those issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks), the recent cuts were downplayed by other traders who say the foreign central banks have a tendency to reduce their U.S. mortgage debt-related holdings when the stock market is turbulent. The skeptics pointed out that the foreign central banks shed even more U.S. Treasuries and MBS during the European debt crisis in 2012.
The reports stated that if the trend of foreign banks selling off U.S. mortgage-related debt continues, and expands, however, it will result in an in increase in costs for refinancing homes.
The next meeting of the Federal Reserve Open Market Committee to determine if the Fed will raise interest rates will be September 16 an 17, after which the FOMC will have two remaining meetings in 2015. The rates have been at or near zero for a record nine years.
As of August 26, foreign central bank ownership of U.S. Treasuries was $3.018 trillion, which was an increase of $5.6 billion from the week before, according to Reuters. The amount of U.S. Treasuries held by the foreign central banks is considerably larger than the amount of agency MBS they hold ($285 billion).
