Caribbean-based hedge funds are taking over demand for Treasuries as foreign central bank interest wanes. The Federal Reserve's custody holdings of Treasuries for foreign central banks recently fell to a low during the Treasury's quarterly refunding, a period of heavy issuance.
This marks a sea change from heavy Treasury buying by foreign central banks after months of currency intervention, according to George Goncalves, government strategist at Banc of America Securities. Meanwhile, hedge funds have taken up the slack in demand in a currency play of their own as the dollar strengthens against the euro, he said.
The amount of Treasuries held in custody grew only $1 billion during the most recent refunding week, compared with an average pick-up of $12 billion. In addition, foreign central bank buying of Treasuries fell to 4% from 71% of total Treasury purchases in the fourth quarter of 2004.
Meanwhile, Caribbean banking centers, assumed to be hedge funds, took up 65% of flows from being net sellers of the securities.
The increased buying by hedge funds makes it harder to predict patterns of Treasury buying and selling than foreign central banks, Goncalves argued. Hedge funds could easily turn around and quickly sell-off Treasuries on profit-taking, he said.
