Treasury selling may be a sign that countries still need the dollar, Goldman Sachs says
Recent Treasury selling reflects reserve management rather than a structural retreat from the dollar, Goldman Sachs says.
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Currency
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1 mins
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Business Insider
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Huileng Tan
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The recent Treasury selloff looks more like routine reserve management than a structural move away from the dollar.
- The recent Treasury sell-off looks like routine reserve management, not a dollar exodus, Goldman Sachs says.
- The oil-price surge from the US-Iran conflict pressured Asian currencies and fueled Treasury selling.
- Despite foreign selling, Treasury markets remain resilient with deep liquidity and stable demand.
The recent Treasury sell-off has reignited concerns that global demand for US debt — and the dollar — may be weakening.
However, the selling wave looked broadly consistent with historical reserve-management behavior rather than a structural shift away from dollar assets, according to Goldman Sachs in a Wednesday note.
Higher oil prices tied to the US-Iran conflict have hurt energy-importing economies across Asia, increasing pressure on currencies and foreign reserves and contributing to Treasury selling across the region.
On Thursday, 10-year Treasury yields rose nearly 5 basis points to 4.5281% around 12 a.m. ET.
"FX intervention in a managed currency is typically a sign that policymakers intend to keep it tied to the Dollar," wrote Isabella Rosenberg, a strategist at the Bank.
Foreign holdings of US Treasurys slid in March, led by declines in holdings from Japan and China, official data showed.
A more serious threat to long-term Treasury demand would be evidence that countries with managed exchange rates were moving away from the greenback as a reserve anchor, reducing their structural need for dollar reserves, Rosenberg wrote.
That's because foreign central banks often sell Treasurys during periods of dollar strength to stabilize local currencies. That process can temporarily reduce Treasury holdings even while countries remain deeply tied to the US financial system.
More importantly, Goldman said the Treasury market has shown little sign of lasting stress despite the wave of foreign selling, with swap spreads and other indicators stabilizing after an initial shock in March.
Treasury demand is still supported by the depth and liquidity of US capital markets, as well as the lack of viable alternatives large enough to absorb global reserve flows at scale, Goldman said.
Assuming the conflict eventually eases, Goldman said renewed dollar weakness and lower market volatility would support foreign demand for Treasurys again.
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