ROI-Are central banks selling Treasuries? Probably, just not that much: McGeever

By Jamie McGeever

ORLANDO, Florida, April 1 (Reuters) - Are central banks unloading Treasuries amid the controversial U.S.-led war in the Middle East? Likely yes, but it's complicated.

On the one hand, foreign-owned Treasuries held in custody at the New York Federal Reserve just fell to a 16-year low below $3 trillion. This suggests foreign central banks are selling, and at an increasingly rapid pace.

As I wrote last week, the decline in Fed "custody" holdings since the Iran war started on February 28 has been eye-catching. Deutsche Bank strategists estimate that the $75 billion fall in the four weeks to March 19 pointed to $60 billion of net selling by central banks. That would mark some of the most aggressive selling ever.

On the other hand, official U.S. Treasury International Capital (TIC) figures - the gold-standard data for foreign holdings of U.S. Treasuries - show that foreign central bank sales last year were minuscule, and that net purchases in January were the biggest in 13 years.

So which is it?

SELLING OR SHIFTING?

Fed custody data is a useful proxy for foreign central banks and their Treasuries, but it's not perfect.

While the vast majority of custody holdings represent foreign central bank totals, they also reflect the holdings of quasi-official bodies like sovereign wealth funds and multilateral agencies.

Importantly, changes in Fed custody holdings don't necessarily reflect how much - or even if - central banks are buying or selling. For example, custody holdings cratered by $238 billion last year, suggesting central banks were dumping U.S. bonds at breakneck speed.

Yet official TIC data showed that foreign central banks' net sales of Treasury bonds and notes last year totaled only $34 billion, barely 1% of their $3.5 trillion stash.

How do we square that?

Moves in the custody data can be explained by changes in bond prices and exchange rates. Also, some of the "selling" can sometimes simply reflect central banks shifting their holdings to non-U.S. jurisdictions or other parts of their investment network.

As Brad Setser of the Council on Foreign Relations has long argued, the recent decline in China's official holdings of Treasuries to a 17-year low is partly explained by the fact that Beijing has been funneling vast quantities of foreign assets, including Treasuries, into its state banks. China's real holdings are probably much higher than the official figure suggests.

NOMINAL HIGHS, SHRINKING FOOTPRINT

We must wait until May for the release of the official TIC data, which will show whether central banks actually sold in March. They probably did, given the decline in custody holdings, weak foreign demand at recent Treasury auctions, falling bond prices, and reports of Middle East and emerging-market authorities raising cash to offset the hit from the war.

Still, it's worth recalling that the last official TIC data released in mid-March showed that foreign central banks bought a net $50.6 billion of Treasuries in January. Not only was that a rare month where official demand exceeded private-sector demand, it was central banks' biggest monthly purchase in 13 years and second largest ever.

The private sector has been a big buyer of U.S. bonds in recent years, with investors plowing nearly $1 trillion into Treasuries over calendar years 2024 and 2025, TIC data show, easily offsetting the $61 billion of net selling from central banks.

In fact, foreign ownership of Treasuries has never been higher. At the end of last year, overseas investors held $9.23 trillion of U.S. government debt, comprising $7.78 trillion of bonds and notes, and $1.45 trillion of bills. Those are all record highs.

But as a share of the overall Treasuries universe, foreign ownership is gradually declining. In the fourth quarter of last year, it fell to 32%, the lowest since 1997, according to analysts at Morgan Stanley, although that share had flatlined at around 33-34% since the pandemic.

In short, central banks are likely selling Treasuries, but at the margin and not in huge size. Not yet anyway.

(The opinions expressed here are those of Jamie McGeever, a columnist for Reuters)

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