As the Treasury maintains its largest auctions, central banks in the world could play a role in helping to reduce the debt supply set up to hit markets this year.
The strong economic reversal with major exports such as Taiwan, China and Thailand compared to the US, coupled with a weaker dollar, could help bolster demand for government bonds while Americans question who will fund U.S. deficits that are set to widen as a result of the pandemic- induced collapse in economic activity and fiscal relief packages.
That could see reserve managers for overseas central banks reiterating their historic role as a major buyer of U.S. government debt, after being marginalized by domestic investors and the Federal Reserve in recent years.
See: This chart shows that American investors are outsourcing foreign buyers when they accept the $ 4 trillion Treasurys issued this year
The U.S. dollar index with trading pressure is down to 111.89, around its lowest levels since May 2018. The dollar has lost 11% of its value compared to other currencies from the highest level it hit in March last year.
Meanwhile, the 10-year Finance note TMUBMUSD10Y,
it was at 1.07%, about 16 basis points higher than where it started at the end of the year. Bond prices are moving the other side of yields.
FRED
Analysts at BofA Global Research say central banks are serving as ballast for the Treasurys market when the dollar comes under pressure for two reasons.
One, central banks need to buy more dollar-denominated holdings to offset the decline in the value of such assets.
Two, a weaker green background has forced central banks of major export economies to accumulate U.S. government debt in an effort to limit the strength of their currencies, and reduce the competitiveness of their exports.
Oliver Brennan, head of macro strategy at TS Lombard, says emerging mid-market banks appear to be showing greater demand for U.S. dollar denominated stocks. He estimated that foreign exchange reserves among these deep market participants had risen $ 500 billion since the beginning of last year.
But it is not clear to what extent this collection is or will change to demand for U.S. government bonds.
While some Asian economies such as Taiwan, Singapore and India have seen an increase in their official Treasurys holdings last year, the total amount held by foreign central banks and sovereign wealth funds has remained overall, rising slightly to $ 4.17 trillion in November from $ 4.10 trillion. in November 2019.
Lack of inflows could reflect central banks’ efforts to diversify their diversified foreign exchange reserves, Khoon Goh, head of Asian research at ANZ, said in an emailed comment.
Goh cited data from the International Monetary Fund, which showed a gradual decline in U.S. dollar denominated assets as the total share of central bank reserves fell to 60.5% in the third quarter of 2020, from 63.5% in the year. third quarter of 2017.
IMF
But Goh said central banks were likely to slow the pace of stock collection as a result of increased scrutiny and pressure from the U.S. Treasury Department over monetary intervention policies.
U.S. Treasury Secretary Janet Yellen said in her confirmation hearing that the value of the dollar should be determined by markets, and that the U.S. should oppose other countries’ efforts to weaken their currencies in order to gain a competitive advantage.