The U.S. Treasury market is confronting potential selling pressure from overseas official investors, a development that has triggered high market alertness.
According to a research report released by Deutsche Bank on March 23, the value of U.S. Treasury holdings in foreign official accounts custodied at the New York Fed plummeted by $75 billion over the past four weeks. This marks the largest monthly decline since the market shock induced by the COVID-19 pandemic in 2020. Based on historical data models, this change implies that foreign official investors actually conducted net sales of U.S. Treasuries amounting to approximately $60 billion, also the highest level since the pandemic began.
These figures corroborate the recent sharp rise in U.S. Treasury yields, particularly the unusual upward movement in intermediate-term (belly) yields—a segment where foreign official holdings are concentrated. Deutsche Bank warned that if overseas demand continues to shrink, the "convenience yield" advantage of U.S. Treasuries could be eroded, posing a substantial risk of rising long-term yields.
Custody data reveals signals of selling. The most authoritative source for tracking foreign official investor activity in U.S. Treasuries is the U.S. Treasury's TIC (Treasury International Capital) report. However, this data suffers from a significant publication lag—figures for March will not be available until mid-May at the earliest.
As an alternative indicator, the weekly H.4.1 report published each Thursday by the New York Fed includes a memorandum item recording the face value of securities custodied for foreign official and international accounts, with a lag of just one day. Deutsche Bank strategists Matthew Raskin, Steven Zeng, and Andrew Fu pointed out in their report that the latest H.4.1 data, calculated on a weekly average basis, shows a $75 billion decline in U.S. Treasury holdings custodied for foreign official accounts over the past four weeks. This is not only the largest decline since March 2020 but also the second-largest four-week drop in the past decade.
Notably, unlike a similar situation in March 2023, the scale of FIMA repo facilities did not increase simultaneously this time. This indicates that the current reduction constitutes direct sales or a decision not to reinvest maturing securities, rather than obtaining liquidity through repo operations with the Federal Reserve. Foreign reverse repo activity, foreign official deposits, and FIMA securities lending also showed little change over the past month.
Custody data is highly correlated with TIC data. To what extent do changes in custodied holdings reflect the overall changes in foreign official holdings of U.S. Treasuries? Deutsche Bank conducted a systematic verification.
The report indicates that over the past 15 years, the correlation between changes in custodied holdings and foreign official net purchases reported in TIC data has been quite significant, with the former explaining about 50% of the variation in the latter. Even when narrowing the sample period to post-2019 to mitigate potential interference from changes in reserve management patterns, this relationship remains robust.
Based on this historical relationship, the $75 billion decline in custodied holdings corresponds to net sales by foreign officials of approximately $60 billion. Deutsche Bank noted this would represent the largest net selling by foreign official accounts since the COVID-19 pandemic; to find a comparable instance, one would need to look back to December 2018.
The decline in custodied U.S. Treasury holdings aligns closely with market dynamics recently observed by Deutsche Bank's foreign exchange strategy team.
According to a previous report from Deutsche Bank's FX strategy team, the U.S. dollar failed to strengthen as expected following the outbreak of war involving Iran and a surge in oil prices, partly due to large-scale foreign exchange interventions by several Asian central banks. Concurrently, the team's high-frequency ETF monitoring data also showed a noticeable slowdown in foreign investor purchases of U.S. dollar assets.
The convergence of these two clues points to a common conclusion: foreign official investors are reducing their allocation to U.S. dollar assets, with the selling of U.S. Treasuries being a direct manifestation of this trend.
Sustained 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 a "convenience yield" stemming from the U.S. dollar's reserve currency status, and this advantage is now under scrutiny.
The report cites previous Deutsche Bank research indicating that the current 10-year U.S. Treasury yield is more than 100 basis points lower than the level implied by the U.S. Net International Investment Position (NIIP). Another recent academic working paper estimated that the dollar's reserve currency status keeps U.S. long-term interest rates approximately 90 basis points below "normal levels."
Deutsche Bank warned that if foreign demand experiences a persistent decline, this convenience yield would face pressure to normalize. This would create substantial room for an increase in the term premium and overall yields of U.S. Treasuries, directly impacting investors holding these securities.