Fed's Custody Data

The Federal Reserve has long competed with the private sector in offering foreign central banks custodial services (yes Brown Brothers Harriman, my employer is offers custodial services to a wide range of asset manager). The Fed reports its holdings every Thursday. Today it reported that custody holdings fell by $21 bln in the week through Wed.

This is the seventh consecutive weekly decline and over this period, custody holdings have fallen an average of about $12-$12.5 bln a week, making this past week was quite large relative to trend. It likely reflects foreign central banks selling of Treasuries to intervene to support their currencies rather than a dumping of Treasuries to diversify reserves or as a protest to such low interest rates. The decline in recent weeks appears to be the largest since the Asian financial crisis in the 1997-1998 period.

Yet the difficulty with this hypothesis is that during the week through Wed, most emerging market currencies have generally risen against the dollar. This generalization holds true for East Asia which is suspected to use the Fed's custodial services. For some of the run--seven week streak--the dollar was appreciating in general, so private sector dollar buying offset the official selling, but now--over past week--it would seem like the central banks and the private sector has been on the same side selling dollars.

This time series is different that the Treasury's International Capital report (TIC) that is released around the middle of the month. The TIC data picks up data from the activities of US banks. Some central banks may buy their Treasuries from a non-US bank and then wire them, for example to their account at the Fed. This would be an example of a Treasury holding by a foreign central bank that is not picked up in the TIC report but is part of the Fed's custodial holdings.

That said, the most recent TIC report was for the month of July and both it and the Fed's custody holdings showed around a $13.5 blin increase in official Treasury holdings. The August report is due out on Oct 18. In the month of August, the Fed's custody holdings of Treasuries for foreign official accounts rose by about $34 bln.