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The Federal Reserve acts as a custodian for foreign central banks and institutions for their Treasury and Agency holdings. They report the figures weekly. Custody holdings of US Treasuries rose $41 bln as of July 1 from May 27. Indeed, despite the talk of central banks (from China to Saudi Arabia and Russia), the Fed's custody holdings rose to a record high in early July to $3.035 trillion.

Emerging market currencies sold off hard last month. Only two emerging market currencies gained against the dollar in July, the Hungarian forint (1.1%) and the Romanian Leu (0.1%). The Fed's custody holdings appear to be largely a function of foreign central bank intervention. As the emerging market currencies sold off, US custody holdings of Treasuries fell by $49 bln through July 29.

Last week's report covering the week ending August 5 showed a seemingly inexplicable jump of $29 bln in the Fed's custody holdings. Yet all the emerging market currencies but the Indian rupee (+0.25%) fell against the US dollar. 

A recent report by Bloomberg had an inflammatory headline: China Slashed US Debt Stake by $180 bln, Bond Shrug. The report picks an arbitrary period beginning in March 2014. The US Treasury data covering that period is clear. In March 2014, Treasury figures estimated China's Treasury holdings at $1.272 trillion.  As of May 2015, China held $1.270 trillion.

Where does Bloomberg's $180 bln estimate come from? It assumes that nearly the entire fall of Belgium's holdings reflect covert sales by China. The US Treasury estimates that Belgium's Treasury holdings fell from $381.4 bln in March 2014 to $202.8 bln in May 2015. The justification is a claim that Belgium is "home to Chinese custodial accounts." This is hardly convincing evidence that all of Belgium's sales were for China.

Marc Chandler
Global head of currency strategy at BBH
Marc to Market

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