U.S. Fed's balance sheet shrinks for first time since February

FEDERAL RESERVE - NEW YORK. The Federal Reserve's assets shrank this week for the first time since February, reflecting a sharp drop in currency swaps with foreign central banks and a continued slackening in demand for other emergency credit facilities.

The Fed's balance sheet - composed of assets ranging from U.S. Treasury bonds and mortgage-backed securities to loans to banks and state governments - fell to US$ 7.14 trillion on June 17 from US$ 7.22 trillion a week earlier, Fed data released on Thursday showed.

It was the first decline since the end of February, just before the Fed slashed interest rates to near zero and kicked a bevy of emergency credit facilities into overdrive to soften the economic blow from the coronavirus pandemic and the recession it has since triggered.

The US$ 74.2 billion decline, the largest weekly drop since 2009, was driven by a US$ 92 billion drop in foreign exchange swaps with other central banks to US$ 352.5 billion on Wednesday from US$ 444.5 billion a week earlier. The total amount outstanding in the swap lines, designed to ease a surge in demand for U.S. currency in the participating banks' jurisdictions during the early weeks of the crisis, was the lowest since early April.

TD senior U.S. rates strategist Gennadiy Goldberg said in a research note that the swap decrease may have been driven by banks making room for cheap loans known as TLTROs, or because they are able to fund elsewhere. The European Central Bank on Thursday announced record take-up of its new round of TLTROs, which stands for targeted longer-term refinancing operations.

Together with softening demand for a number of other emergency credit programs, that offset an increase in purchases of Treasuries and mortgage-backed securities.

The Fed's stash of Treasuries rose by nearly US$ 19 billion to a record US$ 4.17 trillion, while it added US$ 83.1 billion in MBS, the most in five weeks, for a total of $1.92 trillion.

The data showed the Fed has not embarked on a massive corporate bond purchasing spree since tweaking its Secondary Market Corporate Credit Facility to set up direct bond purchases in addition to shares of bond exchange traded funds. The facilities' assets rose by US$ 1.5 billion to US$ 38.9 billion from a week earlier.

More than 80% of the assets in the SMCCF are the Treasury Department's seed money. It has acquired just over US$ 7 billion of corporate bonds or bond ETF shares since it launched several weeks ago.