(The opinions expressed here are those of the author, a

columnist for Reuters.)

By Jamie McGeever

ORLANDO, Florida, June 17 (Reuters) - As debate rages

around 'de-dollarization' and the world's appetite for

dollar-denominated assets, one major cohort of overseas

investors appears to be quietly backing away from U.S.

securities: central banks.

That's the conclusion to be drawn from the New York Fed's

latest 'custody' data, which shows a steady decline in the value

of Treasuries and other U.S. securities held on behalf of

foreign central banks.

There are many ways to gauge foreign demand for U.S. assets,

and they often send conflicting signals. Moreover, the broadest

and most accurate measures, like U.S. Treasury International

Capital (TIC) or the International Monetary Fund's 'Cofer' FX

reserves data, come with a long lag of two months or more.

The New York Fed custody holdings figures are weekly, which

is as 'real time' as it gets in the world of central bank flows.

These figures last week showed that the value of U.S.

Treasuries held at the New York Fed on behalf of foreign central

banks fell to $2.88 trillion. That's the lowest since January,

and the $17.1 billion decline was also the biggest fall since

January.

Including mortgage-backed bonds, agency debt and other

securities, the total value of foreign central banks' U.S.

custody holdings at the New York Fed last week dropped to $3.22

trillion, the lowest since 2017.

That figure has fallen by around $90 billion since March,

just before President Trump's 'Liberation Day' tariff debacle on

April 2, with more than half of the decline coming from

Treasuries.

If these moves are representative of broader trends, then FX

reserve managers are reducing their exposure to U.S. bonds, as a

share of their overall holdings and in nominal terms too.

MURKY PICTURE

It's not easy to get a firm handle on the exact composition

of central banks' dollar-denominated assets, which are worth

trillions and are spread across multiple sectors, jurisdictions

and continents. This is why different cuts of central bank data

can tell different stories.

For example, the latest TIC data show that foreign holdings

of U.S. Treasuries rose to a record $9.05 trillion in March,

with official sector holdings increasing as well. The official

sector held nearly $4 trillion of bills and bonds, around 45% of

all foreign exposure.

But these figures are nearly three months out of date, and

foreign demand for Treasuries in recent months - in the

secondary market and, more recently, at auction - has been

driven by private sector institutions, not the official sector.

There are large pools of 'hidden' FX reserves too

potentially worth trillions of dollars, held in offshore

accounts, overseen by quasi-official entities like sovereign

wealth funds or, in the case of China, state banks.

Meghan Swiber, director of U.S. rates strategy at Bank of

America, says the fall in custody holdings is a warning sign,

especially as it has been accompanied by a modest decline in

foreigners' usage of the Fed's overnight reverse repo (RRP)

facility.

When Treasuries mature, foreign central banks will often

park the cash at the RRP. But they haven't been doing that

lately, Swiber says, meaning both their Treasury holdings and

overnight cash balances at the Fed are falling.

"We worry about foreign demand going forward," Swiber wrote

on Monday, also pointing out that it's "unusual" for reserve

managers to reduce their U.S. Treasury holdings when the dollar

is weakening. "This flow likely reflects official sector

diversification away from dollar holdings."

The $28.5 trillion Treasury market is deep and liquid, and

central banks remain significant participants in it. They are

cautious and careful by nature, meaning any changes to their

holdings will be gradual.

But the weekly custody data suggest some central banks may

already be getting that ball rolling.

(The opinions expressed here are those of the author,

a columnist for Reuters)

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