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US debt holdings at foreign central banks continue to increase

March 21, 2010
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Foreign central banks' holdings of U.S. Treasuries and agency debt at the Federal Reserve rose in the latest week, data from the U.S. central bank showed on Thursday. The combined holdings of Treasuries and agency securities by foreign central banks at the Fed rose $29.63 billion to a total of $3.009 trillion in the week ended March 17.

Treasuries held by overseas central banks at the Fed rose $27.498 billion to total $2.236 trillion.

Foreign central banks' holdings of securities issued or guaranteed by the two biggest U.S. mortgage financing agencies, Fannie Mae (FNM.P) and Freddie Mac (FRE.P), rose by $2.14 billion to $773.11 billion in the latest week.

Overseas central banks, particularly in Asia, have been huge buyers of U.S. debt in recent years and own more than a quarter of marketable Treasuries. Japan and China are the biggest such buyers.

The U.S. Federal Reserve's balance sheet rose to a record high in the latest week, Fed data released on Thursday showed, on the back of the central bank's soon-to-end mortgage support program.

The Fed's balance sheet -- a broad gauge of its lending to the financial system -- rose to $2.290 trillion in the week ended March 17 from $2.265 trillion in the previous week.

The Fed's holdings of mortgage-backed securities backed by U.S. housing finance agencies Fannie Mae (FNM.N) and Freddie Mac (FRE.N) rose to $1.066 trillion from $1.029 trillion a week earlier.

The central bank's ownership of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank System fell to $167.49 billion from $169.01 billion a week ago.

At the end of March, the Fed will complete its mortgage securities purchases, the pillar of its quantitative easing program that was adopted to hold down home borrowing costs in a bid to revive the battered housing sector.

Four top Federal Reserve officials urged Congress on Thursday not to strip the U.S. central bank of the authority to supervise small banks, saying they would lose an important finger on the pulse of the economy that helps them guide monetary policy.

A financial regulatory overhaul bill unveiled in the U.S. Senate this week would diminish the powers of most of the regional Fed districts and leave some with no banks to oversee.

"It is a travesty," Thomas Hoenig, president of the Kansas City Federal Reserve Bank, told a bankers' group. "It is absolutely disenfranchising our relationship with a very important, hugely important, sector outside of Wall Street across the United States."

"It makes the central bank the central bank of Wall Street and not of the United States," he said.

U.S. stocks are likely to suffer a correction in the second quarter as anxiety about the Federal Reserve's exit strategy sparks caution, Barclays Capital said on Thursday.

"Uncertainty around the implications of policy normalization is likely to be the catalyst for a correction in global bond markets, which should prompt a correction in equities in the second quarter," Barclays Capital said in its latest Global Outlook.

"We maintain a cautious equity stance in both the United States and Europe. Looking further out to the end of this year, however, we maintain a more constructive view."

Writing in their equity outlook, Barclays Capital analysts Barry Knapp and Edmund Shing said it was unlikely that the period of adjustment that sparked a sell-off in mid-January was complete.

U.S. stocks have bounced back, and the Dow Jones industrial average .DJI and the Standard & Poor's 500 .SPX this week hit 17-month highs.

Financial News USA

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