Practical analysis for investment professionals
01 July 2014

Poll: What Will Foreign Central Banks Do as the Federal Reserve Unwinds QE?

Posted In: Economics

Since the US Federal Reserve began reducing (tapering) its purchases of US Treasury securities in December of 2013, many investors have begun to wonder how the status quo might change. According to the last 20 years of IMF data on foreign-exchange reserves (Currency Composition of Official Foreign Exchange Reserves, or COFER), official aggregate holdings of US-dollar-denominated claims by all foreign countries peaked at 55.8% in 2000. Since then, there has been a persistent decline in the aggregate foreign-exchange reserve holdings of other central banks, reaching 32.6% as of Q4 of 2013 (the latest period for which aggregate data are available).

In particular, the two largest holders of US Treasuries, other than the Fed, are the Bank of China and the Bank of Japan. The People’s Bank of China had been ramping up its holdings of US treasuries until 2010, reaching a peak of $1.6 trillion (or 24% of foreign reserves). Since then, it has been reducing holdings of US Treasuries on both an absolute basis and as a percentage of its foreign exchange reserves.

China’s holdings of US Treasuries have now fallen to $1.2 trillion (as of April 2014), which is now just 21% of their foreign exchange portfolio. Interestingly, the Bank of Japan appears to be vying for the top slot as it has been ramping up ownership of US treasuries in the past several years and now also own about $1.2 trillion of US Treasuries. In a fascinating mystery, Belgium has emerged as the third largest holder of US Treasuries, more than doubling its holdings in the past 12 months to approximately $360 billion.

Perhaps foreign central banks are masking their true intentions by trading through private custodian EuroClear, which has confirmed that trading volume of US Treasuries has “dramatically” increased recently. Whatever the case, the so-called taper portends a disruption to the status quo. Should these major holders of US treasuries accelerate their allocations to other currencies, it could mean higher interest rates globally.

Consequently, we asked CFA Institute Financial NewsBrief readers what they expected foreign central banks might do with the US-dollar-denominated assets.

The FT/IMF recently reported that more than 62% of foreign central banks’ assets are denominated in US dollars, of which a significant portion is in US Treasuries. As the Federal Reserve unwinds its quantitative-easing program, foreign central banks will most likely:

What Will Foreign Central Banks Most Likely Do As the Federal Reserve Unwinds Its Quantitative-Easing Program?

Of the 563 respondents, nearly two-thirds expect foreign central banks to maintain or increase their exposure to US Treasuries, which would represent a break from the current aggregate trend of reductions. An additional 10% suggested that these central banks might sell US Treasuries but maintain US dollar exposure by purchasing other dollar-denominated assets. Only 23% expect central banks around the world to shift away from the US dollar and toward other currencies.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

About the Author(s)
Ron Rimkus, CFA

Ron Rimkus, CFA, was Director of Economics & Alternative Assets at CFA Institute, where he wrote about economics, monetary policy, currencies, global macro, behavioral finance, fixed income and alternative investments, such as gold and bitcoin (among other things). Previously, he served as SVP and Director of Large-cap Equity Products for BB&T Asset Management, where he led a team of research analysts, 300 regional portfolio managers, client service specialists, and marketing staff. He also served as a Senior Vice President and Lead Portfolio Manager of large-cap equity products at Mesirow Financial. Rimkus earned a BA degree in economics from Brown University and his MBA from the Anderson School of Management at UCLA. Topical Expertise: Alternative Investments · Economics

Leave a Reply

Your email address will not be published. Required fields are marked *

By continuing to use the site, you agree to the use of cookies. more information

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.