Washington: Foreign central banks liquidated Treasury holdings at the fastest clip in nine years and tapped a key Federal Reserve facility to raise cash as banking stress roils markets.
Fed data show foreign official holdings of Treasury securities fell by $76 billion in the week through March 22 to $2.86 trillion. That’s the largest weekly decline since March 2014.
At the same time, the US central bank’s recently-established Foreign and International Monetary Authorities, or FIMA, repurchase agreement facility was tapped for a record $60 billion, data show, dwarfing the $1.4 billion peak reached during the height of the pandemic.
The latest surge in dollar demand came as concerns about the fragility of the banking sector spread from the US to Europe, culminating in the takeover of beleaguered Swiss lender Credit Suisse Group. The dash for dollars all happened before the focus pivoted to Deutsche Bank Friday. The German bank’s shares slumped, on track to close at a five-month low, while the cost of insuring its bonds against default rose.
“Our sense, given dollar funding rates, is that the borrowing was precautionary,” Barclays strategist Joseph Abate said of the surge in use of the Fed’s FIMA program.
The facility was established in March 2020 and is designed to help ease any pressures in global dollar funding markets. It allows foreign central banks to post their US Treasury holdings as collateral in exchange for dollar liquidity, which is often in high demand during times of stress. The rate was 4.75 per cent at the time of the operations, before the Fed raised borrowing costs by another quarter-point this week.
The weekly average level of usage as of Wednesday was $33 billion, which suggests an institution made multiple trips to the FIMA facility, according to Barclays.
“The central bank wanted to build a war chest of available dollars in case the banking crisis deteriorated but did not want to fire sell its Treasuries,” Abate wrote in a note to clients.
Of the $136 billion of cash raised from the Treasury sales and repo borrowing very little made its way directly back onto the Fed’s balance sheet or the broader custody program. Balances at the foreign reverse repo pool only rose by $3 billion through March 22, and the Fed’s custody holdings of agency securities, which includes mortgage-backed securities “- only increased by $7 billion. This suggests a majority of the cash raised by central banks may have gone into private markets, according to Wrightson ICAP.
“Someone, somewhere, needs dollar funding,” said Antoine Bouvet, senior rates strategist at ING Bank. It’s “not a huge worry at this stage given the cross-currency bases and also low take-up in dollar FX lines.”
Major central banks tapped swap lines with their US counterpart for just $590.5 million in the past week even after officials moved to make the facilities available daily in light of global banking concerns. In the US, banks reduced their borrowings only slightly from two Fed backstop facilities in the most recent week, a sign that institutions are taking advantage of the central bank’s liquidity in the wake of turmoil.
Funding markets had been showing signs of stress, though pressures have subsided with the take-up of emergency measures.
That included swings in Treasury-bill rates and moderate dislocations in the instruments where banks and others ordinarily go for their short-term money. Repurchase agreement rates were elevated for a number of days, cross-currency basis swaps have whipsawed and the gap between direct floating-rate agreements and index-tied ones “- often used as a measure of the difficulty banks have in getting access to funds “- also swelled.
Still, there’s concerns as to whether deposits will continue fleeing banks for other places in the financial system. US money market funds have been scooping up cash recently, fueled in large part by depositors pulling their money away from US banks.