In March, foreign holdings of US Treasurys dropped the most in at least two decades.
The decline — nearly $257 billion — underscored the depth of the COVID panic, which, during the darkest days, was defined by a mad dash to raise USD cash. The veritable fire sale of USTs represented a 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.
The latest TIC data, out Monday, shows the amount of foreign holdings falling another $44.7 billion in April to a four-month low of $6.77 trillion. Net, foreigners sold $176.7 billion in Treasurys, the transactions table shows.
The Fed’s swap lines and the generalized stabilization of markets in April likely alleviated the need for foreign holders to raise dollars with outright sales of US Treasurys.
Similarly, April’s more benign market conditions may have removed some of the pressure on currency pegs and emerging market FX. Notable declines in March were observed for Saudi Arabia, Brazil and India, indicating not just precautionary liquidation due to rampant uncertainty, but mounting pressure on EMs and, in the Kingdom’s case, pain from the double-barreled shock of the pandemic and plunging crude prices.
The latest data shows Saudi holdings falling further in April, which isn’t surprising given volatility in the oil market.
China’s holdings decreased by $8.8 billion from the previous month, while Japan’s holdings fell $5.7 billion.
A handful of lawmakers on Capitol Hill (most notably Lindsey Graham) have floated various versions of a lunatic scheme to orchestrate a selective default on some US debt “owed to China” as a way of extracting reparations for the virus. Never mind the fact that US Treasurys are just securities (not hand-written IOUs to Xi) which China is free to sell. That banter died down as nationwide protests against inequality in the US forced the White House to focus on domestic issues.
Japan retains its lead on China as America’s largest creditor.
The decline in foreign holdings is set against a backdrop of ballooning supply to fund the virus relief effort in the US.
That said, the Fed is obviously accommodating that issuance, and besides, the data above comes on a delay, so it will be another month (or two) before we can really line up the numbers for foreign holdings with issuance tied to fiscal spending stateside.