US Debt Shed By Central Banks Since 2014 As Dollar Needs Rise

In order to raise money as banking stress shakes the markets, foreign central banks sold their Treasury assets at the fastest rate in nine years and used a crucial Federal Reserve facility.

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According to Fed data, foreign government holdings of Treasury securities decreased by $76 billion to $2.86 billion in the week ending March 22. Since March 2014, that is the greatest weekly drop.

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Data show that at the same time, a record $60 billion was drawn from the freshly established Foreign & International Monetary Authorities, or FIMA, renewal fees facility of the US central bank, dwarfing the peak of $1.4 billion reached the height of the pandemic.

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Before the spotlight shifted to Deutsche Bank AG on Friday, there was a recent rise in dollar demand as worries about the fragility of the banking industry moved from the US to Europe, ending in the acquisition of troubled Swiss lender Credit Suisse Group AG. On course to close at a five-month low, the German bank's shares fell, and the expenses associated with insuring its bonds from default increased.

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According to Barclays Plc strategist Joseph Abate, "given dollar funding rates, our opinion is that the borrowing was preventative." The Fed's FIMA program has seen a sharp increase in usage.

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The facility was created in March 2020 with the intention of reducing any strains in the international dollar finance markets. It enables foreign central banks to exchange their holdings of US Treasury securities for dollar cash, which is frequently in high demand during stressful times. Before this week's additional quarter-point increase in borrowing rates by the Fed, the rate was 4.75% at the time of the activities.

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According to Barclays, the average weekly level of usage since about Wednesday was $33 billion, which means an institution visited the FIMA facility more than once.

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Abate stated in "The Central Bank Wanted to Build a War Chest of Accessible Dollars in Case the Banking Crisis Devolved" that the central bank "did not want to fire sale its Treasuries."

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Only a small portion of the $136 billion in funds obtained through Treasury sales and repo financing found its way back onto the Fed's balance sheet or the larger custody program. By March 22, there was just a $3 billion increase in the balance in the foreign reverse repo pool, and a $7 billion increase in the Fed's custodial holdings of agencies' securities, including include home loan securities. According to Wrightson ICAP, this means that the majority of the money raised by the federal reserve may have entered private markets.

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According to Antoine Bouvet, senior rates analyst at ING Bank NV, "someone, somewhere, needs dollar funding," but it's "not a significant problem at this time given existing cross-currency foundations and also low turn-in dollar FX lines."

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Even after officials pushed to make the facilities available every day in light of global banking worries, major central banks only used their swap lines with their American equivalent for $590.5 million in the previous week. In the most recent week, banks in the US hardly decreased the amount they borrowed from two Fed backstop facilities, indicating that organizations are making use of the central bank's liquidity in the wake of the unrest.

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A measure of how expensive it is to obtain dollars, the rate across important cross-currency basis swaps, has also tightened from peaks seen earlier this month.