Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

Well, that time out in the 'everything rally' didn't last long. Wall Street and precious metals hit new highs on Wednesday as investors shrugged off any potential reason to play safe, such as the U.S. government shutdown, and resumed buying.   

More on that below. In my column today I look at the amount of foreign-owned Treasuries held at the Fed, which has just fallen to a 13-year low, and what this might tell us about 'de-dollarization' and overseas demand for U.S. assets.

I’d love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* Let it loose!

Policymakers around the world are engaging in a remarkable drive to juice growth, simultaneously revving up both their monetary and fiscal engines to full tilt. What makes it so extraordinary is the economic and financial backdrop it is being done against.

A U.S. capex boom in AI is driving solid growth and earnings expectations, inflation in much of the developed world is above 2% target, financial conditions are the loosest in years, public debt dynamics are deteriorating, and many markets - stocks, gold and crypto - are at record highs. It's safe to say, the easing push is not without risks.

* Is Japan trailblazing again?

Zooming in on that a bit more, and the focus settles on the easy policy king: Japan. From 'NIRP' and 'ZIRP' to yield curve control, from QE to record public debt, Japan in recent decades has singelmindedly pursued policies often considered unorthodox, unworkable or unrepeatable elsewhere.

Yet where Japan has led, the developed world has usually followed, and the emergence of fiscal dove Sanae Takaichi as the country's next prime minister could be the latest example of this. "Japan is once again trailblazing the path for western markets," says SocGen's Albert Edwards.

* Wait a minute

Minutes of the U.S. Federal Reserve's last policy meeting released show that division among policymakers on the need for further interest rate cuts is perhaps deeper than first thought, or was previously indicated by Chair Jerome Powell.

"Most participants" thought it appropriate to lower rates towards a more neutral level due to labor market risks, but at the same time "a majority of participants" emphasized the upside risks to inflation which has been running above target for over 4 years. Maybe two more rate cuts this year aren't a slam dunk?

The amount of U.S. Treasuries held at the New York Fed on behalf of global central banks has slumped to its lowest in over a decade, casting renewed doubt on foreign appetite for U.S. sovereign debt and other dollar-denominated assets.

This may seem a little surprising. Recent data, including the Treasury International Capital and International Monetary Fund's 'Cofer' foreign exchange reserves reports, show overseas demand for Treasuries and dollar assets holding up pretty well.

These two data sets are the gold standard measurements for U.S. capital flows and global FX reserves. But they are released with long lags - the last set of TIC data is for the month of July, and the latest Cofer numbers are for the second quarter.

The New York Fed custody holdings figures aren't as comprehensive - central banks can hold their Treasury bonds elsewhere - but they are weekly, which in the world of cross-border, central bank capital flows is virtually 'real time'. 

And right now, these custody holdings are falling. Fast.

The latest figures show that the value of U.S. Treasuries held at the New York Fed on behalf of foreign central banks is $2.78 trillion. That's the lowest since August 2012, and down $130 billion in just two months.

Indeed, it's notable that peak holdings over the last year and a half, of $2.95 trillion, were in March-April this year, coinciding with peak market volatility around U.S. President Donald Trump's 'Liberation Day' tariff chaos. According to this temperature check, foreign central banks seem to have cooled on Treasuries since then. 

Fed custody holdings are only one measure of overseas demand for Treasuries. Could they be a precursor for upcoming TIC and Cofer reports?