Contrary to widespread narratives of dollar decline, data shows that foreign investment in U.S. Treasuries is increasing, but with a strategic shift in custody and settlement practices. The rise of European clearinghouses and de-officialization are key trends.
The narrative of a collapsing dollar, fueled by Iran's potential exit and attacks, misses the mark when examining the actual flow of funds into US Treasury bonds. Despite concerns about the weaponization of the dollar and the rise of alternative monetary systems like BRICS, the data reveals a more complex reality. Foreign investors, in aggregate, are increasing their holdings of US debt at an accelerating pace, challenging the de-dollarization thesis.
The focus should shift from whether foreigners hold US Treasuries to how and where they are held, especially in light of the post-2022 sanctions regime against Russia.\The U.S. Treasury's Treasury International Capital (TIC) data highlights this trend. Foreign holdings of US debt have been steadily rising, reaching nearly $9 trillion. The UK, Belgium, and Japan have been major purchasers, with the UK increasing its holdings by a substantial amount. Belgium, home to Euroclear, a leading international central securities depository, has seen a significant percentage increase in its holdings. While China has reduced its direct holdings, this doesn't tell the whole story. A considerable portion of China's Treasury positions are custodied through European intermediaries like Belgium and Luxembourg, suggesting a strategic shift in custody rather than a wholesale abandonment of US debt. This shift is driven by a desire for flexibility and operational efficiency, leveraging the sophisticated infrastructure provided by entities like Euroclear.\ The important story focuses on who holds the debt and how it is custodied. While official institutions, particularly central banks, have slightly decreased their holdings since 2021, private foreign investors have more than offset this reduction. The decline in official holdings is linked to risk management, triggered by the freezing of Russian reserves in 2022. Central banks are reevaluating their legal and operational exposures, leading to a shift in custody and settlement routes. Private foreign holdings, including those of banks, asset managers, and sovereign wealth funds, surpassed official holdings in 2023 and continue to grow. This signifies not de-dollarization, but de-officialization – dollars are still flowing in, just through different channels. The increasing use of European clearinghouses like Euroclear is driven by a desire for flexibility and operational efficiency. The SEC’s mandate requiring central clearing of most Treasury cash and repo transactions further complicates matters and could potentially drive trading activity offshore, away from US regulatory oversight
US Treasuries De-Dollarization Foreign Investment Euroclear Sanctions
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