Foreign Central Bank Activities in U.S. Futures Markets

We analyze the daily positions of 31 foreign Central Banks in U.S. interest rate futures markets between 2003 and 2011 to investigate whether such positions reveal targeted hedging or informed profit-making decisions. Central Bank positions before the financial crisis of 2007-2009 are consistent with hedging some underlying balance sheet exposure. During and after the crisis, the pattern suggests an attempt to enhance returns on foreign reserve assets. In particular, Central Banks held and profited from directional positions in 5- and 10-year T-Note futures in a manner indicative of a non-hedging strategy. We also examine whether Central Bank position changes show synchronization as if they are affected by common shocks or reflect coordinated policy actions. We identify differences before and after the onset of the financial crisis: Euro-linked Central Banks become more synchronized while non-European Central Banks show no significant change in synchronization during the crisis. We also document that Central Bank positions generally account for a small fraction of the overall size of these markets, so it is unlikely that these institutions' goal is to influence U.S. interest rates