Foreign Central Banks Reduce U.S. Treasury Holdings by $48 Billion Since March

Central banks and other foreign entities, including sovereign wealth funds, have significantly reduced their holdings of U.S. Treasuries. These entities, which typically keep their assets in the custody of the New York Federal Reserve, saw a decline of $17 billion last week, bringing the total reduction to $48 billion since late March. This shift coincides with the implementation of tariffs by President Donald Trump, which triggered a bond sell-off and heightened market volatility.

Market observers are closely monitoring these developments, as a pullback in bond buying from central banks could lead to higher borrowing costs for the U.S. government. If other investors do not fill the gap left by central banks, the U.S. Treasury could face financial challenges. The recent turmoil in the bond market has raised concerns about the stability of U.S. debt, particularly as the dollar continues to weaken.

Since the chaotic rollout of tariffs in April, equities have rallied, and Treasury yields have stabilized. However, the dollar's decline remains a significant issue, with monetary authorities reducing their exposure to American bonds. This reduction in demand from large and stable central bank buyers has fueled concerns about potential turbulence in the fixed-income market.

Foreign buyers account for roughly 30% of the U.S. Treasury market. A recent note from Bank of America suggested that demand from these investors is showing signs of weakness. This is particularly concerning given the U.S. government's need to finance increasing levels of debt. If foreign investors no longer view U.S. Treasuries as a safe haven, the Treasury may need to offer higher yields to attract buyers, potentially increasing interest rates across the economy.

Foreign holdings of U.S. Treasuries reached an all-time high of $9.05 trillion in March, reflecting a nearly 12% increase from the previous year. However, more recent data indicates a significant drop in foreign holdings of U.S. assets at the New York Federal Reserve. This decline is unusual, as it occurs during a period of dollar weakness, typically when such sales are less likely.

Monetary authorities usually park the cash generated from selling U.S. debt in the New York Fed’s reverse repurchase facility, where they receive Treasuries as collateral. However, foreign participation in this facility has fallen by $15 billion since late March, suggesting a net outflow of U.S. assets held by foreigners at the Fed. This drop is particularly strange, as it does not appear to be driven by currency defense or rebalancing efforts.

Instead, it seems that central banks and other official entities are diversifying away from U.S. assets. Rising trade tensions have given nations more reason to reduce their dependence on the world’s largest economy. This trend is concerning, as foreign private holders like banks and institutional investors may follow suit, leaving a gap in demand for U.S. Treasuries.

Looking at the Fed’s “flow of funds” data from the first quarter of 2025, demand for U.S. Treasuries primarily came from foreign investors and broker-dealers. If foreign investors continue to reduce their holdings, it could have significant implications for the bond market. The stability of the U.S. Treasury market relies heavily on foreign demand, and any reduction in this demand could lead to higher borrowing costs and increased financial risks for the U.S. government.