Fed custody holdings hit new record highs the week ending July 1st with treasuries and agency debt held on behalf of foreign official and international accounts rising $27.903 bln in the latest week to $2.781 tln.
The sharp rise in custody holdings continues to show strong demand from foreign central banks for dollar holdings in reserves.
PG comment: This is an interesting trend that I’ve been watching develop for some time now. I follow TIC data pretty closely, viewing foreign flows of capital into and out of the US as a pretty significant indicator of – if nothing else – risk appetite. However, there are some important differences in TIC data and FRBNY custody holdings (see question 10a on this Treasury Dept page).
In all honesty, my knowledge of these particular data are insufficient for me to draw any kind of conclusion without reverting to pure speculation. So let me just pose the question that’s been rattling around in my head and leave it to our gentle readers to perhaps draw their own conclusions:
If we are to believe the global economy has truly turned the corner – that the worst of the economic crisis is behind us – why do foreign official institutions continue to pile into dollar denominated assets when concerns about dollar risk have been repeated ad nauseum, and to the point where a number of very major economic players have vociferously called for an alternative reserve currency?
When you consider the substantial growth, price and systemic risks associated with the United States, I’m curious to know what is driving the trend that has resulted in record FRBNY custody holdings that are approaching $3 trillion.
Let’s keep an eye on this. I believe the highs will continue to increase as the economy lags.
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