Overseas Funds Accelerating Withdrawal, US Treasuries Face Largest Selling Pressure in Six Years

Written by: Bu Shuqing

Source: Wall Street Journal

The U.S. debt market is facing potential selling pressure from overseas official investors, which has raised market alertness.

According to Chase Wind Trading, Deutsche Bank’s research report released on March 23 shows that foreign official accounts held at the New York Fed have sharply decreased by $75 billion over the past four weeks, marking the largest monthly decline since the COVID-19 pandemic in 2020. Based on historical data modeling, this change indicates that the actual net selling of U.S. Treasuries by foreign official investors is about $60 billion, also the highest since the pandemic.

This data aligns with recent market movements of sharply rising U.S. Treasury yields, especially the abnormal upward movement of mid-curve (belly) yields—where foreign official holdings are concentrated. Deutsche Bank warns that if overseas demand continues to decline, the “convenience yield” advantage of U.S. Treasuries will be eroded, and long-term yields could substantially rise.

Custody Data Signals Selling

The most authoritative source tracking foreign official investors’ U.S. Treasury movements is the U.S. Treasury’s TIC (Treasury International Capital) report, but this data is significantly delayed—March data won’t be available until mid-May.

As an alternative indicator, the weekly H.4.1 report published by the New York Fed includes a memo item recording the face value of securities held in custody by foreign official and international accounts at the Fed, with only a one-day lag. Deutsche Bank strategists Matthew Raskin, Steven Zeng, and Andrew Fu note in their report that the latest H.4.1 data shows that, on average over the past four weeks, foreign official accounts’ holdings of U.S. Treasuries have decreased by $75 billion, representing not only the largest decline since March 2020 but also the second-largest single-cycle drop in nearly a decade.

Notably, unlike the similar situation in March 2023, this round of selling did not coincide with an increase in FIMA repurchases, indicating that this reduction is due to direct sales or maturities without reinvestment, rather than liquidity easing through repurchase operations with the Fed. Foreign reverse repos, foreign official deposits, and FIMA securities lending have also remained largely unchanged over the past month.

Custody Data Highly Correlated with TIC Data

To what extent can custody holdings data represent the overall change in foreign official investors’ U.S. Treasury holdings? Deutsche Bank has conducted systematic validation.

The report shows that over the past 15 years, the correlation between custody holdings changes and foreign official net purchases in TIC data is quite significant, with custody data explaining about 50% of the variation in TIC net purchases. Even when narrowing the sample to since 2019 to exclude potential disruptions from reserve management mode changes, this relationship remains robust.

Based on this historical relationship, a $75 billion decline in custody holdings corresponds to approximately $60 billion in net foreign official selling. Deutsche Bank notes this would be the largest net selling by foreign official accounts since the COVID-19 pandemic, with the earliest comparable case dating back to December 2018.

Capital Flow Changes in the Context of Forex Interventions

The recent decline in U.S. Treasury custody holdings aligns closely with market dynamics observed by Deutsche Bank’s FX strategy team.

According to their previous reports, amid the outbreak of the Iran war and soaring oil prices, the dollar failed to strengthen as expected, partly because several Asian central banks implemented large-scale foreign exchange interventions. Meanwhile, high-frequency ETF monitoring data also shows a clear slowdown in foreign investors’ purchases of dollar assets.

These two signals together point to a conclusion: foreign official investors are reducing their allocations to dollar assets, with Treasury sales being a direct manifestation of this trend.

Persistent Selling Could Push Long-Term Yields Up by Over 100 Basis Points

Deutsche Bank’s analysis reveals a structural concern: U.S. Treasury yields have long benefited from the “convenience yield” provided by the dollar’s reserve currency status, but this advantage is now under threat.

The report cites previous Deutsche Bank research indicating that the current 10-year Treasury yield is more than 100 basis points below the level implied by the U.S. net international investment position (NIIP). Recent academic working papers estimate that the dollar’s reserve currency status makes U.S. long-term rates about 90 basis points lower than “normal levels.”

Deutsche Bank warns that if foreign demand continues to decline persistently, the convenience yield will face reversion pressure, and the term premium and overall yields on Treasuries could rise substantially, directly impacting investors holding U.S. debt.