Pandemic Panic Produced Historic, Quarter-Trillion Decline In Foreign Treasury Pile

Foreign holdings of US Treasurys dropped the most in at least two decades during March, the latest TIC data shows.

The drop clocked in at $256.6 billion, bringing total foreign holdings down to $6.81 trillion, from $7.07 trillion in February. Net, foreigners sold $299.35 billion in Treasurys, the transactions table shows. That’s a record. In February, by contrast, they bought a net $4.9 billion.

The drop has no precedent – at least not going back to 2000.

One of the more notable stories in early April (i.e., after the calendar flipped on what was arguably the most tumultuous month for markets in history), was a record drop in marketable Treasury securities held in custody for foreign official and international accounts.

Specifically, the drop for March was nearly $110 billion (documented here). That was a record, and it wasn’t even close.

That underscored the extent to which March was defined by a mad dash to raise USD cash.

The veritable fire sale of USTs represented an apparently frantic effort to obtain dollars, and was in no small part responsible for the Fed’s decision to roll out a foreign repo facility to compliment swap lines which were enhanced and expanded during March’s tumult.

As I wrote at the time, oil exporting countries and Asian economies were likely liquidating Treasurys, while central banks more generally were dumping their least liquid US debt, exacerbating some of the dramatics (dramatics like these). Remember, there are pegs that need to be maintained, and during times of acute stress accompanied by dollar strength, interventions aimed at stabilizing local currencies are sometimes necessary.

Throw in the USD funding needs of corporates in foreign locales, and it was apparent that the swap lines either weren’t adequate, weren’t enlarged enough (i.e., the Fed didn’t cast a wide enough net) or some combination of both.

A quick look at the TIC data out Friday shows that Saudi Arabia, Brazil and India saw the largest outflows. “It was a pretty large liquidation from a lot of the foreign accounts”, TD’s Gennadiy Goldberg said. “There was a lot of precautionary liquidation given the uncertainty, especially in emerging market economies”.

“It makes sense they would have to sell Treasuries to defend their currencies at a moment like that”, BMO’s Jon Hill remarked.

Riyadh is, of course, staring down an unprecedented crisis. The kingdom’s reserves are sitting at a nine-year low. Saudi Treasury holdings at the end of March were $159.1 billion, the lowest since March of 2018.

Meanwhile, the drop in China’s holdings was relatively minuscule, while Japan’s holdings rose during the month.

Shinzo Abe better hope he never finds himself on Lindsey Graham’s bad side.



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