Treasury Auctions Get Scoured for Signs of Foreign Demand Slump

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Custody Holdings

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The slide in Treasuries held at the Fed on behalf of foreign and official accounts — amounting to about $66 billion since the war began — has reinforced speculation that overseas appetite for US debt has ebbed, possibly related to the oil price surge, said Jonathan Cohn, head of US rates desk strategy at Nomura Corp.’s US securities arm. 

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“Foreign official selling has rightfully received attention since the start of the war,” Cohn said. Several big oil-importing countries such as Turkey, India and Thailand needing to raise cash “has likely contributed to the meaningful reduction in foreign official Treasury holdings at the Fed” and a concurrent increase in the amount on dealer balance sheets, particularly in the two- to three-year sector, he said.

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As a tactic, shedding Treasuries to raise cash is part of a toolkit that also includes reducing foreign-exchange and gold reserves, Cohn said.

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The Fed holdings trend comports with Bank of New York Mellon Corp.’s custody-based data on institutional investment activity, according to John Velis, Americas macro strategist at BNY. 

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Cross-border holdings of Treasuries “have been falling almost inexorably since last April,” when the US administration unveiled a tariffs agenda that upended global trade, Velis wrote in an April 7 report. Cash-like securities maturing in less than a year account for much of the drop, he said.

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“It’s too early to tell if this shedding of USTs by foreign-based investors is the beginning of a secular decline in demand for USTs or merely a response to a higher inflationary environment and U.S. policy uncertainty,” Velis wrote. 

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Sentiment Shift

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As for last month’s auctions, elevated market volatility that deterred all types of investors, rather than foreigners in particular, may explain their poor results, said Ian Lyngen, head of US rates strategy at BMO Capital Markets.

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“When markets are chopping around on tweets and headlines from the Middle East, a lot can change very quickly,” he added. “Calm market conditions are good for auctions.”

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At the same time, a shift in Treasury market sentiment since yields reached their highest levels in several months at the end of March may translate into better results for this month’s auctions, said Priya Misra, portfolio manager at JPMorgan Asset Management.

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Yields mostly ratcheted higher with oil prices in March. They’ve since retreated from those levels despite further gains for oil — until the cease-fire agreement — because of the potential for the energy price shock to hurt the US economy. 

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Tuesday’s good three-year note auction results are “testament to a cleaner positioning backdrop, level of rates not seen since June 2025 and investors starting to price in not just inflation risks but also growth risks from this conflict,” Misra said. “The relationship between oil prices and front end rates has changed from the early days of the conflict.”

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—With assistance from Alexandra Harris.

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