You may have missed it, but last week major central banks announced the coming end of a facility that provided hundreds of billions of dollars in international swaps, and prevented a calamitous dollar funding crisis last spring.
The Federal Reserve’s three-month currency swaps with other central banks will come to a close on July 1. Weekly operations with a seven-day maturity will continue. The central banks involved stressed that they could revive the longer-maturity facility if needed.
The program is a victim of its own success. More than $1 trillion was extended through it, split roughly equally over seven-day and three-month terms. At its peak, almost $450 billion was swapped, the lion’s share to banks in Japan and the eurozone. Today, the total runs to less than $1 billion.
The policy was free for the Fed. Every dollar extended has been returned, as was the case with swaps conducted in the aftermath of the global financial crisis. At a price of precisely nothing beyond the man-hours of organizing the swaps, its cost-benefit ratio has been off the charts.
There seem to have been positive knock-on effects beyond quelling panic. Cross-currency funding markets aren’t only more relaxed than during the market stress last year, but seem to be functioning better than they were even before that.
In early January 2020, a Japanese investor buying a currency-hedged 10-year U.S. Treasury and hedging their currency exposure on a rolling three-month basis would have received an effective yield of minus 0.2 percentage point relative to domestic government bonds, according to J.P. Morgan tabulations. As of April 22 this year, hedges are far cheaper: Using the same method, a Japanese investor would effectively keep a pickup of 1.16 percentage points in yield.
So the Fed’s policy has contributed to making U.S. assets—not just government bonds but equities and corporate debt—cheaper and safer for international buyers. With a new Japanese fiscal year in place, that may begin to move the needle for the country’s large pension funds, which have sought to raise their allocation to foreign bonds but previously fretted about currency mismatches from extremely high hedging costs.
Only one question really remains: Can the Fed be relied upon in the future? It was clearly in the U.S. national interest to prevent market chaos overseas, but the Fed has no mandate specifically for international financial stability.
For now, the Fed seems to have settled comfortably into a role as international lender of last resort. In doing so, it brought a speedy end to a crisis and ameliorated a persistent imbalance in global markets—all without actually costing the U.S. anything.
Write to Mike Bird at [email protected]
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