Holdings of US Treasuries by foreign central banks have fallen by a record amount over the past four weeks according to the latest Federal Reserve data.
The net $69 billion (Dh253 billion) drop in Treasury holdings registered at the Fed by foreign official institutions comes as benchmark yields ended 2011 near record low levels and when the US central bank is conducting Operation Twist, its $400 billion programme to sell shorter-lived Treasury bonds and buy those with longer maturities.
The decline in foreign holdings of Treasuries in recent weeks has not resulted in higher yields and lower prices because other investors have sought the safety of US debt.
"Given where the ten-year Treasury is ending the year, it's difficult to say the flows are a bearish move," said Ian Lyngen, strategist at CRT Capital.
Article continues below
The yield on ten-year notes was set to end 2011 below 1.90 per cent on Friday and the Barclays Capital index of long-dated Treasuries rallied nearly 30 per cent last year, its best annual performance since 1995.
"While other buyers have willingly taken up the torch up to this point, it seems clear that this [foreign official flows] source of demand has waned since Operation Twist took yields to these levels and this investor base has little interest in sub-two per cent ten-year yields," said John Briggs, strategist at RBS Securities.
The drop in foreign holdings would be far more pronounced had Japan not intervened to buy dollars and sell yen during August and October. The proceeds of dollar purchases, seen in the vicinity of $100 billion in October, went mainly into the Treasury market.
"If not for the bulge of purchases at the end of October due to Japanese intervention it's fair to say we would have seen consistent falls in holdings of Treasuries for most if not all of the second half of the year," said Briggs.
The previous record four week drop for custody holdings at the Fed was a $56 billion decline in September, when the ten-year yield dropped to 1.67 per cent, its lowest since 1945.