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Foreign central banks scoop up Treasuries during debt ceiling fight

NEW YORK, Oct 18 (Reuters) - Foreign central banks have been scooping up billions of dollars of U.S. Treasuries in the recent weeks despite the contentious fight in Washington over the budget and federal borrowing that had threatened a U.S. default.

The $29.7 billion increase in Treasuries in the week ended Oct 16 - when the government had been expected to exhaust its $16.7 trillion borrowing capacity - was the biggest since the week ended Feb. 7 when it surged nearly $42 billion, according to Federal Reserve data released late on Thursday.

This was also the third biggest weekly increase in Treasuries holdings among overseas central banks in three years, according to Fed data.

It was the third straight weekly increase, and so far in the fourth quarter, foreign central banks have padded their holdings of U.S. government debt by $38.6 billion to $2.967 trillion. That is less than 1 percent off their all-time peak in Treasuries holdings set in May.

Foreign central banks trimmed $12.6 billion from their Treasuries holdings during the second and third quarters when there was a massive bond market sell-off due to worries that the Federal Reserve was preparing to reduce its massive bond-buying stimulus, called quantitative easing.

Early last month benchmark 10-year yields rose to 3 percent, their highest in more than two years, about two weeks before the Fed opted not to reduce the $85 billion a month it buys of Treasuries and mortgage-backed securities at its September policy meeting. Investors now do not expect the Fed to cut back until December at the earliest.

Two years ago, foreign central banks also beefed up their Treasuries holdings in the run up to that year's debt ceiling showdown, lifting them from $2.64 trillion at the beginning of July 2011 to $2.68 trillion in the first week of August 2011, when the U.S. credit rating was cut by Standard & Poor's.

On the other hand, foreign central banks pared their holdings of debt issued by U.S. mortgage agencies in the latest week. Their agencies holdings fell by $1.87 billion to $316.33 billion, the lowest level in a month.

Their holdings of securities lumped into the "other" category - which includes securities not backed by the U.S. government such as corporate bonds and commercial paper, among others - rose to a record $39.8 billion.