By Jamie McGeever
ORLANDO, Florida (Reuters) – TRADING DAY
Making sense of the forces driving global markets
By Jamie McGeever, Markets Columnist
A fifth day of war between Israel and Iran pushed oil prices higher and world stocks lower on Tuesday, as investors also digested some weaker-than-expected U.S. economic data and looked ahead to the Federal Reserve’s policy decision on Wednesday.
In my column today I look at data that show overseas central bank holdings of Treasuries and other U.S. assets parked at the Fed are now the lowest since 2017. By this measure, foreign central banks are de-dollarizing. More on that below, but first, a roundup of the main market moves.
If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.
Today’s Key Market Moves
Escalation fuels trepidation
Whatever hope there was on Monday for a de-escalation in the Iran-Israel conflict was obliterated on Tuesday as the two countries kept up attacks on each other, and the U.S. sent more fighter jets to the region and bolstered its forces there.
Investors were further unnerved after President Donald Trump said on social media that the U.S. has no immediate plans to “take out (kill!)” Iran’s Supreme Leader Ayatollah Ali Khamenei but Washington’s patience is “wearing thin”.
Fading prospects of peace triggered a wave of ‘risk off’ activity across world markets. Stocks fell across the board, oil rose, government bond yields fell sharply and the dollar rediscovered its safe haven appeal to notch its biggest rise in over a month.
Curiously, gold barely got any lift, perhaps struggling for renewed momentum so close to its all-time high of $3,500 an ounce. Instead, silver was the best-performing precious metal, climbing to a 13-year high above $37 an ounce.
Adding to the caution were U.S. retail sales and industrial production figures, both of which were weaker than economists expected, at least at the headline level. If U.S. consumers are drawing in their horns and factories are feeling the squeeze even before tariffs hit, growth in the second half of the year will slow.
The outlook for tariffs, growth and inflation – not to mention war in the Middle East – will guide the Fed’s policy decision and revised economic projections on Wednesday. It’s an increasingly difficult line for Chair Jerome Powell and his colleagues to tread.
The Bank of Japan, meanwhile, adopted a more cautious stance on Tuesday. It left its short-term policy rate on hold at 0.5%, as expected, and voted to slow the pace of balance sheet rundown in fiscal year 2026.
With the BOJ’s policy rate likely to remain on hold for the rest of the year, according to market pricing, and the pace of balance sheet reduction not changing until March, the impact on Japanese assets in the near term could be limited.
Not that investors will be getting complacent – the Israel-Iran war and Fed decision on Wednesday will see to that.
Foreign central banks are shrinking U.S. asset exposure
As debate rages around ‘de-dollarization’ and the world’s appetite for dollar-denominated assets, one major cohort of overseas investors appears to be quietly backing away from U.S. securities: central banks.
That’s the conclusion to be drawn from the New York Fed’s latest ‘custody’ data, which shows a steady decline in the value of Treasuries and other U.S. securities held on behalf of foreign central banks.
There are many ways to gauge foreign demand for U.S. assets, and they often send conflicting signals. Moreover, the broadest and most accurate measures, like U.S. Treasury International Capital (TIC) or the International Monetary Fund’s ‘Cofer’ FX reserves data, come with a long lag of two months or more.
The New York Fed custody holdings figures are weekly, which is as ‘real time’ as it gets in the world of central bank flows.
These figures last week showed that the value of U.S. Treasuries held at the New York Fed on behalf of foreign central banks fell to $2.88 trillion. That’s the lowest since January, and the $17.1 billion decline was also the biggest fall since January.
Including mortgage-backed bonds, agency debt and other securities, the total value of foreign central banks’ U.S. custody holdings at the New York Fed last week dropped to $3.22 trillion, the lowest since 2017.
That figure has fallen by around $90 billion since March, just before President Trump’s ‘Liberation Day’ tariff debacle on April 2, with more than half of the decline coming from Treasuries.
If these moves are representative of broader trends, then FX reserve managers are reducing their exposure to U.S. bonds, as a share of their overall holdings and in nominal terms too.
MURKY PICTURE
It’s not easy to get a firm handle on the exact composition of central banks’ dollar-denominated assets, which are worth trillions and are spread across multiple sectors, jurisdictions and continents. This is why different cuts of central bank data can tell different stories.
For example, the latest TIC data show that foreign holdings of U.S. Treasuries rose to a record $9.05 trillion in March, with official sector holdings increasing as well. The official sector held nearly $4 trillion of bills and bonds, around 45% of all foreign exposure.
But these figures are nearly three months out of date, and foreign demand for Treasuries in recent months – in the secondary market and, more recently, at auction – has been driven by private sector institutions, not the official sector.
There are large pools of ‘hidden’ FX reserves too potentially worth trillions of dollars, held in offshore accounts, overseen by quasi-official entities like sovereign wealth funds or, in the case of China, state banks.
Meghan Swiber, director of U.S. rates strategy at Bank of America, says the fall in custody holdings is a warning sign, especially as it has been accompanied by a modest decline in foreigners’ usage of the Fed’s overnight reverse repo (RRP) facility.
When Treasuries mature, foreign central banks will often park the cash at the RRP. But they haven’t been doing that lately, Swiber says, meaning both their Treasury holdings and overnight cash balances at the Fed are falling.
“We worry about foreign demand going forward,” Swiber wrote on Monday, also pointing out that it’s “unusual” for reserve managers to reduce their U.S. Treasury holdings when the dollar is weakening. “This flow likely reflects official sector diversification away from dollar holdings.”
The $28.5 trillion Treasury market is deep and liquid, and central banks remain significant participants in it. They are cautious and careful by nature, meaning any changes to their holdings will be gradual.
But the weekly custody data suggest some central banks may already be getting that ball rolling.
What could move markets tomorrow?
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Jamie McGeever; Editing by Nia Williams)
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