No two periods are alike but what is starkly different now from the GFC is that foreign investors (including foreign central banks – FCBs) were sellers of USTs during the early days of COVID-19 induced financial market stress. This was likely one of the reasons why the Fed stepped in to buy USTs in record amounts. However, the launch of swap lines and the FIMA repo facility helped reduce the need for FCBs to sell USTs to raise dollars.
That said, there has been a trend in place for years now where foreign official accounts have not been meaningfully increasing their holdings of USTs. Its early days post the initial shake up due to the COVID-19 shock, but will FCB demand for USTs ever return in size again, it’s a key question for the market. And will innovations such as the swap lines and repo facility be sufficient versus FCBs having to boost their stock of USTs.
Foreign Official UST Holdings Have Been Relatively Flat Since 2015
Recently I published an article on how the broader foreign investor base of USTs have seen their dominance fade as the Fed and domestic accounts have stepped in to underwrite the expanding US government debt loads. This time we look at the UST holding levels for the foreign official (aka central banks). Chart 1 shows the breakdown of UST holdings (between longer-term USTs, greater than 1-year, versus T-bills) as per TIC data.
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