Valuation-adjusted data show steady demand
According to a recent article by The Globe and Mail, central banks and reserve managers around the world have continued to buy U.S. Treasuries despite the volatility and uncertainty in the bond market. The article cites valuation-adjusted data from Fed economists Carol Bertaut and Ruth Judson, which show that central banks’ holdings of Treasury securities have rebounded from a 10-year low in October 2020, and buying this year is on track to top last year’s $183 billion.
The valuation-adjusted data account for the effects of exchange rate and price fluctuations on the nominal value of central banks’ Treasuries holdings. The article notes that these effects have been significant in recent years, as the U.S. bond market has faced challenges such as soaring government debt issuance, a credit rating downgrade, inflation pressures, and geopolitical tensions.
China and Saudi Arabia reduce exposure
The article also mentions some signs of selling from central banks, especially from major creditors such as China and Saudi Arabia. China’s nominal Treasuries holdings have fallen by $281 billion since June 2020, while Saudi Arabia’s holdings have plunged by more than 40% from a pre-pandemic peak in February 2020. The article suggests that these countries may be diversifying their reserves away from U.S. debt, or using them to support their domestic economies amid the COVID-19 crisis.
However, the article points out that the selling from China and Saudi Arabia may not reflect the broader trend among central banks, as other countries have increased their purchases of U.S. Treasuries. For example, Japan’s nominal holdings have risen by $200 billion since June 2020, while India’s holdings have more than doubled in the same period. The article also notes that China’s share of global central bank reserves has declined from 21% in 2014 to 17% in 2020, while the U.S. dollar’s share has remained stable at around 60%.
Implications for the bond market and the dollar
The article concludes by discussing the implications of central banks’ demand for U.S. Treasuries for the bond market and the dollar. The article argues that central banks’ buying may help to support the bond market and limit the rise in yields, which could benefit borrowers and investors. The article also suggests that central banks’ appetite for U.S. debt may underpin the dollar’s status as the world’s reserve currency, despite the challenges facing the U.S. economy and its fiscal position.
The article quotes Steven Englander, head of global G10 FX research and North America macro strategy at Standard Chartered, who says that “the rhetoric about getting out of dollars far exceeds the active getting out of dollars”. He adds that any actual selling from central banks is low grade, and that if it was a first order effect, it would be reflected in the dollar’s exchange rate.
