Foreign Demand for Treasuries Is Showing ‘Cracks,’ BofA Says

Bank of America reports a decline in foreign demand for U.S. Treasuries, with central banks net selling $48 billion since late March, as measured by custody holdings at the New York Federal Reserve; this trend suggests a potential diversification away from dollar-denominated assets by foreign entities, further evidenced by a $15 billion decrease in foreign holdings in the Fed's reverse repurchase agreement facility during the same period.

Analysis

Bank of America Corp. has highlighted emerging 'cracks' in foreign demand for U.S. Treasuries, evidenced by consistent net selling from global central banks since late March. Data from the New York Federal Reserve shows a $48 billion reduction in Treasuries held in custody by these entities since that period, including a significant $17 billion decline in the week ending June 11 alone. This selling pressure is further underscored by an approximate $15 billion decrease in foreign holdings within the Federal Reserve's reverse repurchase agreement facility over the same timeframe. These combined outflows strongly suggest a deliberate move by foreign official institutions to diversify their reserve assets away from U.S. dollar-denominated instruments, potentially impacting U.S. borrowing costs and the international role of the dollar.

Key Decisions for Investors

• Investors should closely monitor subsequent foreign holdings data and Treasury auction demand, as continued weakness could exert upward pressure on U.S. yields.
• Consider the potential for increased U.S. dollar volatility and a possible weakening trend if this diversification by foreign central banks proves sustained and gathers momentum.
• Evaluate portfolio allocations for sensitivity to rising U.S. interest rates and adjust strategies if the observed reduction in foreign Treasury demand persists.