Min Zeng wsj.com March 14, 2014
An exterior view of the Bank of Russia building in Moscow. European Pressphoto Agency
Foreign central banks’ Treasury bond holdings parked at the Federal Reserve dropped by the most on record in the latest week. Some analysts think the crisis in Ukraine is sparking the move.
Their theory: Russia is shifting its Treasury bond holdings out of the Fed and into offshore accounts. That way, Russia would be able to buy or sell its portfolio if the U.S. and its European allies impose economic sanctions amid growing geopolitical tensions in Ukraine.
Treasury securities held in custody for foreign official and international accounts tumbled by $105 billion in the week that ended Wednesday, according to weekly data released late Thursday. That shrank Treasury bond holdings by foreign central banks to a 15-month low of $2.855 trillion, though still near a record high of $3.02 trillion set in December.
Relations between the West and Russia have deteriorated sharply in recent days as Crimea prepares to hold a referendum Sunday on whether to split from Ukraine and join Russia. Ukraine, the European Union and the U.S. view that vote as illegal. The U.S. and Germany warned that Russia could face economic sanctions if the crisis worsens.
“The upcoming referendum in Crimea and multiple threats of sanctions could have triggered a significant reallocation of Treasurys to non-US custodians,” said Shyam Rajan, interest rate strategist at Bank of AmericaBAC -2.10% Merrill Lynch in New York.
Russian entities held $138.6 billion of Treasury debt as of December 31 which includes both official and private holdings, according to the Treasury Department’s website.
“This is only speculation on our part, but it seems likely that the Russian authorities had more than $100 billion of Treasury debt in custody at the Fed, and it doesn’t seem implausible that they moved it to a jurisdiction where it would be less vulnerable to a U.S. asset freeze,” said Lou Crandall at Wrightson ICAP LLC.
Foreign central banks can park their Treasury bond holdings at the Fed or other banks that offer custody services. Putting Treasury holdings at the Fed makes it easy to buy or sell dollar-denominated assets, similar to the NY Fed housing gold of many foreign central banks, analysts said.
“It’s likely cheaper for the central banks than having other, commercial custodian banks hold the positions on their behalf,” said Anthony Cronin, a Treasury bond trader at Société Générale SA. “If they did transfer these assets out of the Fed, they could have gone to Russian banks or any other offshore bank that provides custodian services.”
Some analysts said central banks other than Russia’s could be selling Treasurys to prop up their local currencies. Many emerging-market currencies fell sharply in January as concerns grew about the health of developing economies.
Despite the selling by central banks, Treasury bond prices have strengthened for each trading session this week as investors sought protection from the haven market over worries about Ukraine’s geopolitical tensions and China’s slowing economy.
The benchmark 10-year note’s yield was recently at 2.633% Friday, down over 0.1 percentage points for the week. It has fallen from a six-week peak above 2.8% made after last Friday’s better-than-expected U.S. jobs report. When bond prices rise, their yields fall.
Some traders took the bond market’s strength as a sign foreign central banks merely transferred their bonds to different accounts, rather than selling them.
“If central banks were selling that much Treasurys, the market would have noticed and would not have traded as well as it has this week,” Mr. Cronin said.
A spokesman from the New York Fed declined to comment Friday.