Foreign Central Bank Demand for Treasuries Ebbs With Bill Supply

(Bloomberg) -- The sharp decline in Treasury holdings of foreign central banks from record highs reached in March -- even as yields climbed -- may sound a false alarm about demand. Both the first-quarter increase and the second-quarter drop track the trend in Treasury bill supply.

“The very robust increase in Fed custody holdings since January and the decline over the last month is in part driven by the recent change in supply of the Treasury bill market,” Steven Zeng, a rates strategist at Deutsche Bank Securities, said in a May 11 note.

Treasuries held in custody for foreign central banks at the Federal Reserve declined by $65 billion from the March 14 peak of $3.11 trillion, falling to $3.04 trillion on May 9. Treasury bill sales surged in the first quarter as seasonal borrowing needs were amplified by the latest debt-ceiling suspension, which allowed the government to replenish its cash coffers. Bill sales have been cut in the current quarter as expected following the April tax-filing deadline.

“It is reasonable to assume foreign central banks participated during the supply deluge, with the securities they initially bought and subsequently retired reflected in the Fed’s custody holdings data,” said Zeng.

Treasury bills outstanding rose $333 billion during the first three months of this year and declined $120 billion last month. Supply should resume increasing over the remainder of the year, with net issuance of bills in 2018 amounting to $386 billion, according to Deutsche Bank.

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