Overseas funds are accelerating their withdrawal, and U.S. Treasury bonds are facing the largest selling pressure in six years!

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The U.S. Treasury market is currently facing potential selling pressure from overseas official investors, a development that has sparked heightened market vigilance.

According to Chasing Wind Trading Desk, a research report released by Deutsche Bank on March 23 shows that the holdings of U.S. Treasuries in foreign official accounts at the New York Fed have plummeted by $75 billion over the past four weeks, marking the largest single-month decline since the shock of the COVID-19 pandemic in 2020. Based on historical data models, this change means the actual net selling by foreign official investors reached around $60 billion, also the highest since the pandemic.

These figures correspond with recent sharp rises in U.S. Treasury yields, especially the unusual increase in yields in the belly of the curve—the very tenors where foreign official investors are concentrated. Deutsche Bank warns that if overseas demand continues to shrink, the U.S. Treasury's "convenience yield" advantage will be eroded, leading to substantial upside risk for long-term yields.

Custody Data Reveals Selling Signals

When tracking the moves of foreign official holders of U.S. Treasuries, the most authoritative source is the U.S. Treasury's TIC (Treasury International Capital) report, but this data has a significant lag—it takes until at least mid-May for March data to be published.

As an alternative indicator, the New York Fed’s weekly H.4.1 report includes a memo item that records the par value of securities held in custody for foreign official and international accounts, with only a one-day lag. Deutsche Bank strategists Matthew Raskin, Steven Zeng, and Andrew Fu noted in the report that, based on weekly averages, the latest H.4.1 data shows a $75 billion drop in foreign official accounts’ U.S. Treasury holdings in the past four weeks—the largest drop since March 2020 and the second-largest single-cycle decline in the past decade.

It’s noteworthy that, unlike in March 2023, there has been no concurrent increase in FIMA repo operations this time, indicating that the reduction stems from direct sales or non-renewals of matured holdings, rather than liquidity being obtained by repos with the Fed. There has been little change in foreign reverse repos, foreign official deposits, and FIMA securities lending in the past month.

High Correlation Between Custody Data and TIC Data

To what extent does custody data reflect total holdings changes by foreign official investors? Deutsche Bank systematically verified this.

Their report shows that over the past 15 years, the change in custody holdings is quite significantly correlated with the net purchases in the TIC data—the former explains about 50% of the latter’s variation. Even when limiting the sample to data from 2019 onward to avoid interference from possible changes in reserve management patterns, the relationship remains robust.

Based on this historical relationship, the $75 billion reduction in custody holdings suggests a net foreign official selling of approximately $60 billion. According to Deutsche Bank, this is the largest net selling by foreign official accounts since the COVID-19 pandemic, and a comparable case would require tracing back to December 2018.

Capital Flows Shift Against the Backdrop of FX Intervention

This drop in U.S. Treasury custody holdings matches the recent market trends observed by Deutsche Bank's FX strategy team.

The team’s earlier report highlighted that in the context of the outbreak of war in Iran and soaring oil prices, the U.S. dollar did not strengthen as expected in part because several Asian central banks carried out large-scale FX interventions. At the same time, their high-frequency ETF monitoring data also showed a clear slowdown in foreign investor purchases of dollar assets.

These two signals combined point to one conclusion: foreign official investors are reducing their allocation to dollar assets, with U.S. Treasury sales being a direct manifestation of this trend.

Continued Selling Could Push Up Long-End Yields by Over 100 Basis Points

Deutsche Bank's analysis highlights a structural concern: U.S. Treasury yields have long benefited from a “convenience yield” associated with the U.S. dollar’s reserve currency status, and this advantage is now being tested.

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

Deutsche Bank warns that if foreign demand continues to decline, this convenience yield will face normalization pressure, and Treasury term premiums and overall yields could rise substantially, posing a direct impact on investors holding U.S. Treasuries.

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The above highlights are from Chasing Wind Trading Desk.

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