BofA sees 'cracks' in foreign demand for Treasuries

Central banks have been selling Treasuries since March, suggesting that they are diversifying away from dollar assets, according to Bank of America Corp.

Treasuries held by global central banks and other official entities in custody at the New York Federal Reserve fell $17 billion in the week through June 11 on average, extending their declines since late March to $48 billion. In addition, foreign holdings in the Fed’s reverse repurchase agreement facility have dropped roughly $15 billion since late March.

The decline is “unusual” because central banks typically buy Treasuries when the dollar is weak, as it has been this year, strategists led by Meghan Swiber wrote in a note Monday, with the title “Foreign UST demand shows cracks.”  

International appetite for Treasuries has been under increasing scrutiny in recent months. President Donald Trump’s trade and fiscal policies have roiled financial markets and fueled speculation that overseas buyers will shun US assets — the so-called Sell America trade. The Bloomberg Spot Dollar Index is down about 8% in 2025, and is near a three-year low in part on concern that the levies will sour the US economy’s prospects.

“This flow likely reflects official sector diversification away from USD holdings,” wrote the strategists, adding that they “remain worried about the outlook for foreign demand.” 

Overseas investors have been an important source of buying for Treasuries. In fact, almost all the demand for Treasuries in the first quarter came from broker-dealers and foreign investors, the strategists said, citing the Fed’s flow of funds data. 

That underscores “an alarming picture” because the dealers’ portion tends to reflect the gap between bond supply and demand from private investors, Swiber wrote. 

“The foreign demand trajectory going forward is concerning especially in light of more global investors looking to reduce US assets or increase hedge ratios,” she said.

The strategists also pointed to “a continued weakening” in foreign participation at the most recent 2- and 20-year auctions.