Central banks sell record sums of US debt

Section:

Some may be using the proceeds for currency market intervention.

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By Robin Wigglesworth, Michael Mackenzie, and Josh Noble
Financial Times, London
Friday, June 28, 2013

http://www.ft.com/intl/cms/s/0/cdc2d99e-dfa6-11e2-881f-00144feab7de.html

Central banks sold a record amount of US Treasury debt last week while bond funds suffered the biggest-ever investor withdrawals as markets shuddered at the prospect of the US Federal Reserve ending its quantitative easing programme.

Holdings of US Treasuries held at the Fed on behalf of official foreign institutions dropped a record $32.4 billion to $2.93 trillion, eclipsing the prior mark of $24 billion in August 2007. It was the third week of outflows in the past four.

Private investors are also dumping fixed income. Bond funds tracked by EPFR Global, a data provider, saw total redemptions of $23.3 billion in the week to June 26. US funds were the worst hit, with withdrawals totalling $10.6 billion, but emerging market debt funds also saw record redemptions of $5.6 billion.

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Over the past five weeks emerging market debt and equity fund outflows have totalled $35 billion, of which $22.5 billion has fled stock market funds.

"People are throwing in the towel," said Markus Rosgen, chief Asia equity strategist at Citigroup. "It'll drag the market down lower over the course of the summer."

Fixed income markets have tumbled since Fed chairman Ben Bernanke first signalled on May 22 that the US central bank would begin reducing its asset purchases later this year. Yields on 10-year US Treasuries have risen sharply since then, hitting 2.52 per cent on Friday compared with 1.62 per cent at the start of May.

The noticeable rise in short-term Treasury yields -- in spite of the Fed stressing it is in no hurry to tighten policy -- could be the result of developing countries selling Treasury holdings to finance currency interventions.

"We can only speculate at this point about which countries were selling and what maturities were being unloaded," said Lou Crandall, economist at Wrightson Icap. "One obvious possibility is that emerging market nations whose currencies have been under heavy pressure sold shorter-dated Treasuries for intervention purposes."

Global markets have recently regained some of their footing, with bond yields declining and most stock markets clawing back some losses. The FTSE All World Index has gained 2.7 per cent since Tuesday.

Fund managers stress that the Fed is still buying billions of dollars' worth of bonds for months to come, and point out that actual interest rate increases are far away.

But some asset managers are concerned that if outflows continue it could force some to sell positions once more and trigger another, deeper leg in the fixed income rout, particularly during the illiquid summer months.

"The summer is hot and shallow. If people capitulate then it will not be nice," warns one senior asset manager.

Equity funds failed to benefit from the move out of fixed income, with redemptions hitting $13 billion in the week ending June 26.

Japan was the only place to see net equity inflows in the past week, but Japanese investors, big holders of US Treasury debt, dumped a net $12 billion of foreign bonds last week, their biggest sale in 14 months.

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