EC Central Bank Investment Strategies

A survey of central banks and sovereign wealth funds by Invesco sheds light on their investment plans.  The traditional separation of markets and the state may be helpful for ideological arguments, but the real situation is more complicated. Central banks and their investment vehicles (sovereign wealth funds) are market participants. In some activities, such as custodian, central banks compete with the private sector. 

The Federal Reserve pays 1.95% interest to member banks for both required and excess reserves.  This is well above interest on passbook savings accounts and even three-month CD rates, some have advocated that the Federal Reserve off retail savings accounts that would pay the same as the member banks receive. We suspect this is a non-starter.  

We see little interest by officials to offer such retail services.US banks saw a small rise in the loan-to-deposit ratio in Q1 18 to almost 71% and range from about 65% to 85% for the largest US banks. As Q2 earnings are reported, this will be one of the metrics investors will scrutinize. Many US banks do not want to see their deposit base be pulled away by the Fed.  

The Invesco survey of 62 central banks found a similar quest for yields that is apparent among many private sector investors. They found central banks were adding US mortgage-backed securities and emerging market bonds. Specifically, over the past two years, the Invesco survey found that on average the MBS holdings rose from 0.7% to 5.4% of central bank portfolios, while emerging market bond holdings increased to 2.2% from 0.5%. Corporate bond holdings appeared to slip slightly from 3.5% to 3.4%.  

The Federal Reserve acts as a custodian for foreign central banks' Treasury and MBS holdings.Net-net this year, the Treasuries held at the Fed have increased by about $11 bln this year.MBS holdings have risen by $29 bln. Foreign official MBS holdings peaked a decade ago near $890 bln. They have not been above $300 bln for three-four years and are near $291.3 bln now.  

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Read more by Marc on his site Marc to Market.

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