Dollar demand soars! Central Banks Reduce U.S. Debt Holdings at Fastest Pace in Nine Years

Abstract: The use of the Fed's overseas liquidity tools also surged, with the use of FIMA repurchase agreement tools reaching a record size of $60 billion, far exceeding the peak of $1.4 billion reached at the height of the epidemic.

As the banking crisis spreads, global demand for dollars surges, central banks quickly reduce their holdings of U.S. debt “to cash out”, the use of the Fed's overseas liquidity tools also surged.

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Federal Reserve data showed that official foreign holdings of U.S. Treasuries fell by $76 billion to $2.86 trillion in the week ended March 22, the largest one-week drop since March 2014.

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Meanwhile, use of the Federal Reserve's Foreign and International Monetary Administration (FIMA) repurchase agreement instrument reached a record $60 billion, well above the $1.4 billion peak reached at the peak of the epidemic.

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The Fed's FIMA repurchase agreement instrument was launched on March 31, 2020, to support liquidity in global financial markets and cushion the impact of the epidemic on the global economy. The instrument allows foreign central banks and international organizations to use their holdings of U.S. Treasuries as collateral to request dollar liquidity from the Fed to ease funding pressures.

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In response to the surge in the use of the FIMA repurchase agreement tool, Barclays strategist Joseph Abate was quoted in the media as saying, “We feel the borrowing is precautionary given the dollar funding rates.”

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Notably, only a small portion of the $136 billion raised by foreign official agencies from the sale of U.S. debt and FIMA repo has flowed directly back into the Fed's balance sheet or broader custody program.

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As of March 22, the balance of the foreign reverse repo pool had increased by only $3 billion, while agency securities in Fed custody (including mortgage-backed securities) had increased by only $7 billion.

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Analysis by Wrightson Bond Market Research (Wrightson ICAP) suggests that the above phenomenon suggests that much of the cash raised by central banks may have gone into the private market.