RPT-COLUMN-Fed custody holdings ring 'de-dollarization' alarm: McGeever

(Repeats Oct 8 item to widen distribution. The opinions expressed here are those of the author, a columnist for Reuters.) By Jamie McGeever ORLANDO, Florida, Oct 8 (Reuters) – The amount of U.S. Treasuries held at the New York Fed on behalf of global central banks has slumped to its lowest in over a decade, casting renewed doubt on foreign appetite for U.S. sovereign debt and other dollar-denominated assets. This may seem a little surprising. Recent data, including the Treasury International Capital and International Monetary Fund's 'Cofer' foreign exchange reserves reports, show overseas demand for Treasuries and dollar assets holding up pretty well. These two data sets are the gold standard measurements for U.S. capital flows and global FX reserves. But they are released with long lags – the last set of TIC data is for the month of July, and the latest Cofer numbers are for the second quarter. The New York Fed custody holdings figures aren't as comprehensive – central banks can hold their Treasury bonds elsewhere – but they are weekly, which in the world of cross-border, central bank capital flows is virtually 'real time'. And right now, these custody holdings are falling. Fast. The latest figures show that the value of U.S. Treasuries held at the New York Fed on behalf of foreign central banks is $2.78 trillion. That's the lowest since August 2012, and down $130 billion in just two months. Indeed, it's notable that peak holdings over the last year and a half, of $2.95 trillion, were in March-April this year, coinciding with peak market volatility around U.S. President Donald Trump's 'Liberation Day' tariff chaos. According to this temperature check, foreign central banks seem to have cooled on Treasuries since then. Fed custody holdings are only one measure of overseas demand for Treasuries. Could they be a precursor for upcoming TIC and Cofer reports? DISSECTING DOLLAR SHARE OF FX RESERVES The latest TIC data show that foreign central banks bought a net $17.1 billion of U.S. Treasuries in July. That brings net purchases in the first seven months of this year to $38 billion, according to JP Morgan analysts, some $4 billion more than the same period in 2024. Meanwhile, the latest Cofer figures show that, adjusting for the dollar's steep depreciation, central banks were actually net buyers of dollar reserves in the April-June period. Analysts at Deutsche Bank estimate central banks' purchases of dollar-denominated securities in the quarter – much of which will have been U.S. Treasury bills and notes – nudged $50 billion. These are modest sums when set against the $12 trillion global FX reserves universe and $29 trillion U.S. Treasuries market. But they still point to consistent demand for Treasuries from reserve managers, and pour cold water on the 'de-dollarization' narrative. That's the notion that the world, alarmed at many of U.S. President Donald Trump's policy agendas and America's deteriorating fiscal health, is reducing its exposure to dollar-denominated assets. The dollar has weakened significantly, but overseas demand for U.S. stocks and bonds remains solid, especially from private sector investors. "Latest data releases confirm there is no substantial evidence of an abrupt rotation away from U.S. Treasuries after Trump's April tariff announcements," JP Morgan analysts wrote on Friday. But as noted, the TIC and Cofer figures are dated. We are now in October, and the Fed's weekly custody holdings suggest there may have been a shift since the summer. Standard Bank's Steve Barrow says the decline in custody holdings raises a red flag because it has come at a time of notable dollar weakness. Rapid declines in custody holdings more often occur when the dollar surges because central banks are forced to sell some of their Treasuries to raise cash for FX intervention. "The fact that these custody holdings have fallen so fast might be a sign that central banks have become less enamoured of the Treasury market – and the dollar – in recent months," Barrow wrote on Monday. Weekly data can be volatile, and there are much more comprehensive assessments of central banks' appetite for U.S. Treasuries. But could Fed custody holdings be the canary in the 'de-dollarization' coal mine? (The opinions expressed here are those of the author, a columnist for Reuters) (By Jamie McGeever. Editing by Chizu Nomiyama )

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