Central banks are selling Treasuries at a time when almost everyone else is piling into them.
Monetary authorities outside the U.S. cut their Treasuries held in custody at the Federal Reserve to the lowest level in almost a year. Why? One theory starts with the record-setting rally in the dollar. To protect their own foreign-exchange rates, central banks are selling some of their holdings, exchanging the dollars and bringing the proceeds home.
“Developing countries face weaker currencies,” said Hiroki Shimazu, the senior market economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s second-largest publicly traded bank. “They have to sell U.S. dollars to buy their currencies.” China and Russia are probably following this strategy to prevent exchange rates from fueling inflation in their nations and to keep investors from shifting money out of the countries, he said.
Benchmark 10-year yields were little changed at 2.12 percent as of 6:49 a.m. in London. The price of the 2 percent note maturing in February 2025 was 98 30/32.
The Bloomberg Dollar Spot Index, which tracks the performance of the greenback against 10 currencies, closed at a record Wednesday.
Foreign central banks, which are among the biggest buyers of U.S. government bonds, cut their stakes held at the Fed to $2.92 trillion, based on data from the U.S. central bank Thursday in New York. It was the lowest since March 26, 2014.
Falling yuan positions at Chinese financial institutions suggest the central bank has intervened this year to curb yuan weakness as the currency traded near the limit of its permitted trading range, according to Barclays Plc.
China, America’s largest foreign creditor, cut its holdings of U.S. debt for a fourth month in December, based on the latest figures from the Treasury Department. Its stake of $1.24 trillion was the smallest in almost two years.
The ruble has plunged 40 percent in the past 12 months, according to data compiled by Bloomberg.
The Bank of Russia reiterated last month that it may intervene in the currency market if needed, according to state-run news service RIA Novosti. Central banks intervene when they buy or sell currencies to influence exchange rates.
Russia cut its holdings of U.S. debt by 20 percent in December, the Treasury data show. Its stake amounted to $86 billion, the lowest level since 2008.
Almost everyone else has been buying.
Treasuries have risen for four straight days through Thursday as investors seek higher yields than they can get in Europe or Japan. Ten-year notes yield 0.25 percent in Germany and 0.41 percent in Japan.