The Draw Down Of The Federal Reserve's Custody Holdings Ends

The Federal Reserve reports its custody holdings for foreign central banks on a weekly average basis and on a Wednesday-to-Wednesday basis.  The data is reported every Thursday.  In this space I have been tracking a sustained decline in these holdings in recent weeks.   It now looks like the trend is over.

On a weekly average basis, custody holdings still slipped almost $2 bln.  However, on a Wednesday-to Wednesday basis they rose by $50.6 bln.  Custody holdings include a range of Treasury and Agency paper.  The increase was overwhelmingly Treasuries.

Since last August, the decline has been nearly $100 bln.  Looking back for more than 30 years this looks to be the largest draw down on record and the longest.  During this period, a number of central banks in Asia and Latam (could throw Turkey in there too for good measure) are believed to have sold dollars to smooth out and possible arrest the decline in their respective currencies.

That ended or at least slowed and some central bank may be replacing the reserves they had liquidated.  Yet the fact that the big build took place in the latter part of the period suggests one likely culprit.  Japan.  Although which countries patronize the Fed’s custodial services is not public information, the timing corresponds to Japan’s record intervention of nearly $100 bln.

This also suggests that the decline in custody holdings was a tactical in nature and not the abandonment of the Treasury market in light of the Fed’s pledge to keep rates low for at least two years or Operation Twist.  

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