Financial Times Editorial Comment: Foreign-owned Treasuries
Copyright The Financial Times Limited 2007
Published: June 25 2007 11:48 | Last updated: June 25 2007 11:48
Overseas selling is right up there with “profit-taking” as a handy excuse for inexplicable market downturns. Faceless foreign governments, in particular, make ideal culprits. So many have wondered, as US bond yields bounded towards 5.5 per cent, if the move was driven by central bank selling. After all, governments ranging from China to Kuwait have been vocal about plans to reduce their holdings of dollar-denominated assets.
The most recent data – for April, before bonds really started to head south – does not appear to show a rush out of Treasuries. However, net purchases were only $376m compared with $31bn in March, according to Treasury International Capital, which tracks foreign ownership of bills, and China was a net seller for the first time since April 2005. Still, buying by emerging market central banks – the main holders of US dollar assets – was still strong.
Central banks have taken over from the private sector as the primary financiers of the US current account deficit. Global foreign exchange reserves have doubled since 2003, with emerging market central banks accounting for most of that growth. This trend will continue as authorities in countries such as Thailand struggle to keep their currencies from appreciating. As the dollar weakens, central banks are forced to accelerate their purchases of Treasuries.
This means that despite central banks’ desire for diversification, downward pressure on the dollar makes this difficult to achieve at any speed. What is more, when emerging currencies finally appreciate, reserve portfolios will incur losses, but that is just something that central banks will have to bear. In the longer term, diversification into other currencies and even high-risk investments such as equities is inevitable: dollar- and euro-denominated assets currently account for 90 per cent of central bank holdings and management techniques are becoming more sophisticated.
But that does not necessarily mean that Treasuries will be divested. When the gold standard ended in 1971, the proportion of alternative assets rose, but gold was not sold outright.