Belgium packs punch in US debt ownership

A small country of 11m that recently managed nearly two years without an elected government has assumed a muscular presence among nations that hold US Treasury bonds.

In recent months Belgium has vaulted past well known banking centres like the UK, Switzerland and the Caribbean, and oil exporters to become one of the major holders of US government debt.

The latest US Treasury data released on Tuesday revealed Belgium had expanded its holdings of US debt by a further $30.9bn to $341.2bn during February.

Since last August, Treasury debt attributed to Belgium by official US data has surged from $160bn and this rapid growth means Belgium, with a gross domestic product of $484bn, presently ranks after China and Japan as the third largest foreign holder of US Treasury debt.

Traders say reasons for Treasury holdings to climb so sharply in the home of the European Commission could reflect moves by other countries secretly buying top rated sovereign debt and using Brussels as a financial centre. Or, they say, more investors are utilising the clearing and securities lending services of Euroclear, a bank-owned central securities depository and custody service which is headquartered in that city.

"We know it's not Belgium buying, it's way too much, we need to look at that country's custody services," says Marc Chandler, chief currency strategist at Brown Brothers Harriman.

One likely explanation for the rise of Belgium as a major Treasury holder comes via financial reform efforts that now require the greater use of top rated government debt as collateral for derivatives trades.

Euroclear, which holds more than $22tn in assets under custody, confirmed that the volume of US Treasuries it holds had "gone up dramatically" in recent months.

Traders say Euroclear is renowned for its sophisticated collateral management system, that helps global investors move bonds to various clearing houses around the world.

US Treasury paper is the largest and most liquid of "safe" collateral used to backstop the financial system. Indeed, since the financial crisis, the amount of outstanding US Treasury debt has nearly tripled to $12tn, creating a vast pool of collateral for the global financial system.

The US Treasury has sought in recent years to improve how its official data are collected as some countries purchase government bonds through intermediaries in major financial centres such as London or Hong Kong. This means financial centres are temporarily highlighted as large buyers, rather than the actual countries that are really adding to their Treasury holdings.

The focus on Belgium and its role in the Treasury market will intensify in the coming months, in the wake of a record weekly $105bn drop in US government debt held at the US Federal Reserve on behalf of official foreign institutions in March. At the time, many in the Treasury market believed Russia may have decided to switch its Treasury holdings to another custodian, rather than run the risk of its assets in the US being frozen due to sanctions over Ukraine.

As of February, Russia's Treasury holdings had declined for the past four months to $126.2bn from $149.9bn last October.

In subsequent weeks, the Fed's custody holding rose, suggesting that a foreign institution had switched to another custody service that in turn placed the Treasuries back with the Fed under their name. Not until May with the release of the Tic holdings for March, will the market be able to ascertain whether a large switch occurred.

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