Foreign Treasury Holdings At The Fed Are Falling

Federal Reserve

In a potentially worrying sign for the US Treasury market, foreign holdings of US Treasuries at the Federal Reserve have slipped 7% since July 2015. This is apparently making the rounds of Fed-watching websites and those generally bearish on the bond market in general. They have a point, as unprecedented global monetary easing, sustained since the 2008 financial crisis 8 years ago, has generated record low and even negative interest rates in most of the world.

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The selling may be significant, but from a long term perspective (and keep in mind that the Federal Reserve Bank of St. Louis, which is in charge of keeping these records only has data going back to 2007), the decline is a blip. The only thing out of the ordinary about it is the sustained slightly downward trend in Treasury holdings. See the FRED chart below:

Treasury Holdings at the Fed

As you can see from the chart, there have been times of sharp liquidation of US treasuries of foreign governments held by the Fed, but they were short-lived. So there is nothing particularly alarming about the current rate of liquidation, except for its sustained duration. For the first time since 2007, net treasury holdings have been declining among foreign central banks for more than a year.

The flipside of this chart is that of the 10-year Treasury bond. The earliest date of the above chart is from July 4, 2007, just before the financial crisis. Interest rates on the 10-year at that time were 5.2%. Currently, they are only 1.6%. The danger to the bond market here is not necessarily in central banks themselves liquidating holdings, but the fact that central banks are liquidating holdings in a sustained pattern that could inspire mass liquidation from various sectors of the Treasury market as a whole.

Taken together, the whole situation makes any small rate hike by the Fed particularly dangerous for the bond market, which is collectively at record highs never before seen in human history.

Can this last? Certainly, for some amount of time, yes. That has already been proven. The question is for how long, and what happens to the global public debt load if and when central banks across the world stop buying US Treasuries for good.

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