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Central banks move into riskier assets

Section: Daily Dispatches

By Clare Jones
Financial Times, London
Sunday, April 7, 2013

Central bankers are putting cash into riskier assets and exotic currencies to compensate for ultra-low returns on US Treasuries, according to a poll of officials responsible for almost $7tn in reserves.

The world's central bankers together manage reserves worth $10.9 trillion, most of which is held by monetary authorities in Asia and the Middle East. The bulk of their reserves, usually accumulated from attempts to curb their currencies' gains, are held in the form of US government debt as well as the bonds of safer eurozone sovereigns.

But near-zero interest rates and large-scale money printing have cut returns on these assets to record lows. At the same time, the value of the dollar and other traditional reserve currencies has fallen, forcing central bankers to diversify or risk losses on investment portfolios.

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A poll of 60 central bankers responsible for reserves worth $6.7 trillion, conducted by trade journal Central Banking Publications and the Royal Bank of Scotland, sheds light on the secretive world of official sector investments. The response to the crisis by the major monetary authorities has had a profound impact, the poll found -- more than four-fifths of respondents said the aggressive monetary easing of the Federal Reserve and the European Central Bank had altered their behaviour.

Central bankers, increasingly frustrated with ultra-low returns and the depreciation of the dollar and the euro, have invested in currencies which until recently they would have avoided along with riskier, higher-yielding assets such as equities and lower-rated government bonds.

Respondents to the poll said their forays into foreign currencies would help stabilise global financial markets. But the shift from traditional reserve currencies has spooked some foreign-exchange investors, even though this still only makes up just over 6 per cent of central banks' total investments.

Other investors fear that the size of monetary authorities' cash piles and the lack of transparency among some of the major reserves managers in Asia and the Middle East risk destabilising markets.

The most popular alternative currencies were the Australian and Canadian dollar, the Scandinavian currencies and the Chinese renminbi. About four-fifths of respondents said they had invested, or would consider investing, part of their reserves in Australian or Canadian dollars. More than 40 per cent said they already invested in, or would consider investing, in the renminbi.

About half had, or were considering, branching out into the three Scandinavian currencies and the New Zealand dollar: 14 per cent either owned, or were considering buying, assets denominated in the Brazilian real.

Thirty per cent of respondents, responsible for managing reserves worth $2.5 trillion, said they would probably buy equities -- previously anathema to central banks because of the higher risk associated with shares -- though almost half did not think this would happen for at least five years.

Highlighting their frustrations with low returns on US Treasuries and German Bunds, reserve managers viewed lower grade single-A rated sovereigns and US government agency paper as more attractive than a year ago.

The poll also found that central bankers remain reliant on credit rating agencies, despite attempts by the Group of 20 leading industrialised nations to wean investors off dependence on Moody's, Standard & Poor's, and Fitch in judging the creditworthiness of bonds.

More than four-fifths of respondents had not altered their investment practices as a result of the G20 guidance. However, almost half of those polled said they were spending more on resources to improve the assessment of the creditworthiness of certain assets.

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