SINGAPORE, Oct 30 — Southeast Asian central banks are rebuilding their foreign-currency reserves, raising the prospect they will boost holdings of US Treasuries for the first time since February.

Singapore, Thailand, Indonesia, Malaysia and the Philippines reported increases of about 1 per cent to 3 per cent in their international foreign-exchange holdings in September from the previous month, paring the combined decline this year to 2.6 per cent. Monetary authorities in Asia are among the most aggressive sellers of US debt in 2013 as Malaysia, Thailand and Singapore each reduced ownership by between 20 per cent and 28 per cent through August, data compiled by Bloomberg show.

Policy makers may resume Treasury purchases in the coming months as reserves rise, said Todd Elmer, head of Group-of-10 strategy for Asia ex-Japan at Citigroup Inc. in Singapore. Asian exchange rates rebounded in October after the Federal Reserve unexpectedly maintained stimulus last month, helping revive overseas investment and lessening the need for central banks to intervene to support their currencies.

“Shifts in Treasury holdings are more reflective of ups and downs in reserves holdings, more so than changes in appetite,” Elmer said in an October 23 e-mail interview. “Investors are responding to expectations for delayed Fed tapering, with expansive liquidity arguing for dollar depreciation and inflows into Asian currencies.”

Singapore, Thailand, Malaysia and the Philippines cut their US debt holdings by a total of 26 per cent to a combined US$172 billion (RM242 billion) in the six months to the end of August, US Treasury Department data show.

Better fortunes

Some Asian central banks had drawn on their foreign-exchange reserves to rein in losses in their currencies this year. Those declines were partly triggered by the Fed’s signal on May 22 that it may reduce its US$85 billion a month of bond purchases. Prior to the unexpected delay in tapering on September 18, all of Southeast Asia’s most-active currencies had slumped in 2013, led by Indonesia’s rupiah and the Philippine peso.

Fortunes have since reversed, with the rupiah and Malaysia’s ringgit leading a rally over the past month with gains of 3.3 per cent and 2.4 per cent, respectively. Equities in emerging Asia attracted about US$2 billion of investment in the week ended October 23, more than double the inflows the previous week, according to Australia & New Zealand Banking Group Ltd., citing data from US-based research firm EPFR Global.

The reserves of the 12 biggest developing countries, excluding China and those with managed currencies such as Saudi Arabia, rose by US$38 billion since the start of September to US$2.93 trillion, data compiled by Bloomberg show.

Marginal shifts

“Given that reserves are building up again, I would expect there to be some renewed buying” of Treasuries by Asian central banks, Citigroup’s Elmer said. “Even if there is a desire to reduce the proportion of US dollar holdings in their portfolios, this will probably only come with marginal shifts over a long period of time.”

Asian monetary authorities seeking to buy Treasuries are facing lower returns. Ten-year US notes yielded 2.50 per cent in Asia today, down from 2.85 per cent on September 17 before the Fed announced it would stick with its debt-purchase programme. That’s up from 2.04 per cent on May 22.

Treasuries returned 0.7 per cent this month through October 29, limiting the loss for 2013 to 1.7 per cent, according to data compiled by Bloomberg. That compares with a 2 per cent gain for all of 2012. The Bloomberg USD Emerging Market Sovereign Bond Index climbed 2.9 per cent this month and is down 4.4 per cent this year.

Asian debt

Chua Hak Bin, an economist at Bank of America Corp. in Singapore, said Southeast Asian central banks may still reduce their holdings of Treasuries, with many more comfortable investing in investment-grade bonds of their regional counterparts.

A US government shutdown ended this month after Congress agreed to raise the debt ceiling and avoid a default amid wrangling among political parties over the nation’s finances. The Fed will now delay a reduction in bond purchases until March, according to the median estimate of 40 economists surveyed by Bloomberg, compared with a December prediction previously.

“The recent US fiscal debacle has shaken confidence on the status of the dollar as the predominant reserve currency,” Chua said in an October 24 e-mail interview. “Southeast Asian central banks are diversifying their reserve holdings and reducing the concentration risk in US Treasuries.”

Bond benchmark

The Philippines is diversifying its reserves, central bank Deputy Governor Diwa Guinigundo told lawmakers in Manila on October 21. Governor Amando Tetangco said in a text message to Bloomberg two days later that a benchmark it uses to manage reserves includes Treasuries and other government bonds.

The Monetary Authority of Singapore’s reserve holdings are “diversified across a basket of currencies and assets, which include US Treasuries,” according to a central bank e-mail sent on October 11. Singapore’s official foreign reserves of US$268 billion at the end of September, compared with US$259.3 billion at the end of 2012, MAS said.

Thailand’s foreign-exchange reserves climbed 2.4 per cent in September from a month earlier to US$163 billion, while the Philippines holdings advanced 0.7 per cent to US$83.5 billion, central bank figures shows. Indonesia’s reserves rose 2.9 per cent to US$95.7 billion, according to data compiled by Bloomberg, and in Malaysia they increased 1.1 per cent to US$132 billion, according to the International Monetary Fund.

Active decision

“In the case of Singapore, given that their reserves have risen this year, their reduction of US Treasury holdings reflects an active decision to reduce their reserve exposure to the US,” Khoon Goh, a senior currency strategist at Australia & New Zealand Banking in Singapore, said in an October 23 e-mail.

Singapore held about US$79.4 billion of US Treasuries as of end-August, a 27 per cent drop from a record US$109.5 billion in February, US Treasury Department data show. Thailand lowered its holdings by 25 per cent in the first eight months of 2013 to US$40.1 billion, while Malaysia’s fell 28 per cent to US$13.9 billion.

The Bloomberg-JPMorgan Asia Dollar Index, which tracks the region’s 10 most-active currencies excluding the yen, is headed for a second monthly gain before the US Treasury Department issues September data for foreign debt holdings on Nov. 18. The gauge climbed 1 per cent, building on a 1.3 per cent rally in September that ended four months of losses.

While efforts to boost reserves may leave Southeast Asian central banks with little choice other than to buy US dollars again, the scale may be different, said Sacha Tihanyi, senior currency strategist at Scotiabank in Hong Kong.

“They are essentially forced to be US dollar buyers given the dynamics of managing large foreign-exchange reserves,” Tihanyi said in an October 23 e-mail interview. “They are going to have to be buying US dollars to some degree; however, it may be to a lesser degree than in previous periods of build, given the debt-limit concern.” — Bloomberg