If you view global central banks’ and reserve managers’ appetite for U.S. Treasuries through a value-adjusted lens, official sector demand for U.S. government bonds still looks solid and consistent.
This is maybe surprising, given the fragility of the U.S. bond market in the face of soaring government debt issuance and growing concern over Washington’s fiscal trajectory, a recent U.S. credit rating downgrade, and fairly sticky inflation.
That’s the narrative gripping markets at a time when deepening tensions between Washington and Beijing raise fears that major creditor China is keen to reduce its exposure to U.S. debt, with other central banks quietly keen to follow suit.
The latest country in the spotlight is Saudi Arabia, after a recent Bank of America note highlighted the oil exporters’ nominal Treasuries holdings have plunged more than 40% from a pre-pandemic peak in February 2020.
Bank of America analysts also note that a down year for Treasuries this year will mark the first three-year downturn since the founding of the American Republic.
But while there are signs of selling around the edges from central banks and their market footprint is much smaller than it once was, the reality is rather more benign.
CENTRAL BANK PURCHASES
Valuation-adjusted data show that central banks’ holdings of Treasury securities have rebounded from October’s 10-year low, and buying this year is on track to top last year’s chunky $183 billion.
Indeed, foreign central bank purchases in the two and a half years through June this year come to $283.5 billion, according to Reuters calculations based on adjusted figures from Fed economists Carol Bertaut and Ruth Judson.
That’s well over quarter of a trillion dollars, a large amount in anyone’s book.
Yet the headline dollar value of these holdings has fallen by $281 billion in that period, and by $430 billion from the peak in July 2021. That is entirely due to exchange rate and price fluctuations - mainly the latter.
“Any actual selling is low grade. If it was a first order effect you would see it in the dollar’s exchange rate,” says Steven Englander, head of global G10 FX research and North America macro strategy at Standard Chartered.
“The rhetoric about getting out of dollars far exceeds the active getting out of dollars.”
$550-BILLION VALUATION WIPEOUT
Bertaut and Judson estimate that foreign central banks held $3.87 trillion of long-term Treasury securities at the end of 2021, up $44 billion from a year earlier. Purchases totaled $183 billion in 2021, but valuation effects wiped more than $130 billion off that.
In 2022 the bond market crash saw the value of central banks’ Treasuries holdings plunge by $435 billion, Bertaut and Judson’s estimates show.
Perhaps remarkably for the worst year in decades for Treasuries as the Fed embarked on its most aggressive rate-hiking cycle since the 1980s - the ICE BofA Treasuries index plunged 13% - central banks bought $4 billion of bonds last year.
So far this year, central banks have bought $96 billion of Treasury bonds, and slight positive valuation effects have inflated their total holdings further, by $105 billion, to $3.544 trillion, according to Bertaut and Judson’s figures.
In sum, central banks have bought around $283 billion of Treasuries over the last two and a half years but valuation effects have wiped more than $550 billion off their overall value.
This doesn’t suggest central banks are dumping Treasuries, be it for financial or political reasons. What’s more, these figures don’t account for what analysts describe as stealth or shadow central bank demand not included in the official data.
That may be holdings via third-party countries like Belgium, which have risen a lot recently, or China’s holdings via state banks that could run into hundreds of billions of dollars.
It is undeniable, however, that the collective central bank footprint in the Treasuries market is nowhere near what it used to be.
Buying has not kept up with the rapid surge in debt issuance. In August 2008, a month before Lehman Brothers collapsed, the value of total outstanding marketable Treasuries was $5 trillion. That is now $25.5 trillion.
Other buyers have filled the gap. For now, central banks are still buying, just not as much as they used to.
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