Foreign central banks shed U.S. mortgage bonds

by MPA16 Sep 2015
By Richard Leong

NEW YORK (Reuters) - Foreign central banks cut back their holdings of U.S. agency and mortgage-backed securities as well as Treasuries in the wake of global market turbulence, Federal Reserve data shows.

It is unclear whether those August sales of debt mainly issued or guaranteed by the three federal mortgage agencies, namely Fannie Mae, Freddie Mac and
Federal Home Loan Bank System, are simply a response to the volatility sparked by the slowing Chinese economy and worries about a U.S. interest rate hike by year-end.

Traders are speculating that
China and other emerging economies have been shedding Treasuries in recent weeks to defend their currencies in anticipation of private capital outflows due to fears of a weakening global economy. Large declines in the countries' currencies would make it costlier to import oil, food and other critical goods and services.

"You have some of these bonds maturing and they might simply not be reinvesting into them," said
Sharon Stark, chief fixed income strategist at D.A. Davidson & Co in St. Petersburg, Florida.

In August, weak two-year and five-year Treasuries auctions raised concerns about foreign official demand for low-risk government debt.

Foreign central banks had reduced their holdings of agency debt and mortgage-backed securities at
the U.S. central bank for six straight weeks to $285.21 billion, the lowest level since early May, according to the Fed data released last week.

Last week's decline was $10 billion, the steepest drop since June 2012.


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