Foreign central banks sold off more than $100 billion in US Treasuries as cash demand surged

• Monetary authorities around the world sold more than $100 billion in US Treasuries in the three weeks ended March 25, Bloomberg first reported Wednesday.
• The offloading arrived as liquidity in the Treasury market slipped to historic lows and demand for the dollar skyrocketed on heightened fears of a coronavirus-fueled recession.
• The three-week period ended days before the Federal Reserve announced a new repo facility for central banks to trade Treasuries for dollars.
• The pool "should help support the smooth functioning of the US Treasury market" by offering an alternative to open market transactions, the Fed said in a Tuesday statement.
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Central banks around the world dumped US Treasuries through March as the coronavirus' economic toll stifled liquidity and drove massive demand for dollars, Bloomberg first reported Wednesday.

Foreign monetary institutions sold off more than $100 billion in Treasury notes in the three weeks ended March 25, according to Federal Reserve data. The period ended days before the Fed opened a new repurchase agreement, or repo, facility aimed at giving foreign central banks an alternative method for offloading Treasuries.

Parties cashing in the notes joined other sellers of global government debt looking to boost cash holdings amid a sharp downturn in economic activity, sources familiar with the sales told Bloomberg. Smaller Asian nations and oil-focused economies have primarily sold US debt, while foreign central banks' transactions have been concentrated in older Treasury notes, Bloomberg reported.

Japan is the second-largest holder of US Treasuries with $1.21 trillion in its system, according to Federal Reserve data. China follows with $1.08 trillion in its reserves.

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Market volatility sourced from coronavirus risks tanked liquidity in the Treasury market through last month. Trading slipped to historic lows and clouded traders' view of more than $50 trillion in dollar-denominated debt assets around the world, JPMorgan wrote on March 12. At the same time, the US dollar's value surged as investors piled into safe havens.

The Fed's repo facility was meant to ease foreign trading of Treasuries for US dollars, as fears of a global recession led central banks to prop up their reserves for future payments. While liquidity has crept back into the global Treasury trade, the new pool opens a secondary option for central banks looking to skirt the chaotic open market.

"This facility should help support the smooth functioning of the US Treasury market by providing an alternative temporary source of US dollars other than sales of securities on the open market," the Fed said in a statement

Dollar swap lines between the Fed and foreign monetary authorities had already been established in the wake of rising dollar demand. The US institution has also added trillions of dollars to money markets through capital injections to support domestic lending.

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