Overseas funds accelerating withdrawal, US Treasury bonds facing largest selling pressure in six years!

The U.S. Treasury market is facing potential selling pressure from overseas official investors, which has raised significant market concern.

According to ChaseWind Trading Platform, a research report released by Deutsche Bank 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 suggests that the actual net selling of U.S. Treasuries by foreign official investors is approximately $60 billion, also the highest since the pandemic.

This data aligns with recent market movements, especially the abnormal rise in mid-term (belly) yields—an area 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 rise substantially.

Custody Data Signals Selling

The most authoritative source tracking foreign official investors’ U.S. Treasury holdings 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, the weekly H.4.1 report published by the New York Fed includes a memo item recording the face value of securities held 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 that the latest H.4.1 data shows that, on average over the past four weeks, foreign official accounts have reduced their Treasury holdings by $75 billion. This is not only the largest since March 2020 but also the second-largest single-cycle decline in nearly a decade.

Notably, unlike the similar situation in March 2023, the scale of FIMA repurchases has not increased, indicating that this round of reduction is due to direct sales or maturities without rollover, rather than liquidity through repurchase agreements with the Fed. Foreign reverse repos, foreign official deposits, and FIMA securities lending have also remained relatively unchanged over the past month.

Custody Data Highly Correlated with TIC Data

How well does custody data reflect the overall change in foreign official investors’ U.S. Treasury holdings? Deutsche Bank conducted a systematic validation.

The report shows that over the past 15 years, the correlation between custody holdings changes and net purchases by foreign official investors in TIC data is quite significant, with custody data explaining about 50% of the variation. Even when narrowing the sample to since 2019—excluding potential changes in reserve management modes—the 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 sell-off since the COVID-19 pandemic, with the earliest comparable case dating back to December 2018.

Fund Flows in the Context of FX Interventions

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

Previously, the team reported that amid the Iran war outbreak and soaring oil prices, the dollar failed to strengthen as expected, partly due to large-scale FX interventions by several Asian central banks. 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 sell-offs being a direct manifestation of this trend.

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

Deutsche Bank’s analysis reveals a structural concern: U.S. Treasury yields have long benefited from the “convenience yield” associated with 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 also estimate that the dollar’s reserve currency status has kept U.S. long-term rates about 90 basis points below “normal levels.”

Deutsche Bank warns that if foreign demand continues to decline, the convenience yield will face downward pressure, and the yield premium on longer maturities could rise substantially, directly impacting investors holding U.S. Treasuries.

This insightful content is brought to you by ChaseWind Trading Platform.

For more detailed analysis, real-time insights, and frontline research, please join the 【**ChaseWind Trading Platform - Annual Membership**】.

**Risk Warning and Disclaimer**

Market risks are inherent; investments should be made cautiously. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Investment involves risk, and responsibility rests with the individual.