LIVE MARKETS-Foreign central banks quietly selling Treasuries?

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FOREIGN CENTRAL BANKS QUIETLY SELLING TREASURIES?

A key puzzle in global markets right now is why the U.S. dollar hasn't rallied more forcefully. Typically, a geopolitical shock like the Iran conflict — combined with a spike in oil prices — would send investors rushing into dollar assets. That hasn't fully materialized.

The dollar index has gained about 1.96% so far this month, on pace for its biggest monthly increase since July. By comparison, in the months after Russia invaded Ukraine in February 2022, the dollar advanced more than 5%.

According to Deutsche Bank strategists, one explanation may lie in what's happening behind the scenes: foreign official investors, particularly central banks, may be selling U.S. Treasuries.

Deutsche Bank points to the Federal Reserve's weekly data on "securities held in custody" for foreign official accounts at the New York Fed. The signal from that data has been striking.

Over the four weeks since the Iran conflict escalated, Treasury holdings in Fed custody have fallen by about $75 billion on a weekly average basis. Deutsche Bank estimates that the recent drop implies around $60 billion in net Treasury selling by foreign official investors.

If confirmed, that would mark the largest episode of selling since the pandemic shock — and one of the most significant in recent years outside of that period, the German bank said.

That's not just a routine move. It's the largest four-week decline since March 2020 and the second-largest drop in more than a decade.

The Fed's custody holdings numbers aren't perfect — they only capture holdings custodied at the Fed — but historically, they have tracked broader foreign official flows reasonably well, Deutsche writes.

Importantly, this decline doesn't appear to be driven by technical factors like repo activity with the Fed. Measures such as FIMA repo usage and foreign reverse repo balances have remained largely unchanged. That suggests these are outright sales or redemptions — not temporary liquidity operations.

Direct evidence of foreign flows into U.S. assets usually comes from the Treasury's TIC (Treasury International Capital) data. The problem with that report is timing — it's released with a lag of several weeks. In fast-moving markets, that's not particularly helpful.

Historically, changes in custody holdings explain about half of the variation in official foreign Treasury flows captured in TIC data.

"The focus on potential sales by foreign investors intensified with the sharp rise in Treasury yields late last week, raising questions about the extent to which foreign official accounts may be selling U.S. Treasuries," writes Deutsche Bank.

(Gertrude Chavez-Dreyfuss)

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