Last week, we learned that the amount of U.S. Treasury securities held in custody for international accounts plunged by $US104.5 billion during the week ending March 12.
To be clear, this does not mean those securities were sold. All it means is that they are no longer being held at the Fed.
The leading theory regarding what happened is that Russia moved these securities in advance of potential sanctions that could limit or restrict their ability to access their overseas money.
“There have been other more definitive reports in the media regarding pullback in activity on the part of Russia-based companies and investors in the past few days,” said UBS’s Boris Rjavinski and Matthias Rusinski.
Nevertheless, some folks can’t help but consider the possibility that Russia could start dumping Treasuries on the bond market in an act of economic warfare.
“The big question is: will the Russian institutions sell large amounts of their holdings which could de-stabilise the market in the near term?” said Rjavinski and Rusinski. “To be exact, it is roughly a $US139 billion dollar question, since that was the latest report amount of Treasuries held by Russian official institutions.”
To put Russia’s presence in the Treasury market into context, China holds $US1.26 trillion worth of Treasury securities and Japan holds $US1.18 trillion. According to Treasury data, Russia is only the eleventh largest overseas holder of Treasuries.
“Not only are they far cry from the two behemoths — China and Japan — but also place close to the bottom of the “peloton” in the Treasury buyer’s race,” added Rjavinski and Rusinski.
Basically, Russia isn’t really that big of a player in this market.
Circling back the the issue of falling custody holdings, the analysts offer an alternative explanation.
“While geopolitical conspiracy theories are tempting, there are possible more mundane contributing factors to consider,” they said.
Specifically, they note that last year’s discussion of tapering by the Federal Reserve triggered weakness in emerging market currencies. And data suggests central banks in these economies sold some of their Treasury reserves in their effort to bolster their currencies.
“Without the benefit of detailed breakdown of data, Figure 1 still shows that foreign custody holdings have been in decline since November last year, i.e. long before the latest drop,” they said.
In other words, the recent drop in custody holdings may be at least partially explained a continuation of a declining trend of custody holdings, which in turn is explained by emerging-market selling.