US Treasuries held in custody at the Fed for foreign institutions have fallen to their lowest levels this year, down $100bn since April. While structural demand supports the Treasury market, ongoing foreign central bank selling may weigh on the US Dollar (USD), ING's FX analyst Chris Turner notes.

Fed custody data shows $100bn decline since April

"We note the continued decline in the amount of US Treasuries held in custody by the Fed on behalf of foreign official institutions. "

"The weekly data released last night showed holdings dropping to the lowest levels of the year and down $100bn from early April. The US Treasury market, however, is doing fine, and one could argue that structural factors like adjustments to the Enhanced Supplementary Liquidity Ratio or the need to back Stablecoins with Treasury Bills are helping."

"Yet the Fed custody holdings data suggests that foreign central banks may be continuing to reduce US Treasuries and potentially dollar exposure, too, in their FX reserves. In other words, while the Treasury market may be ok in that the US private sector picks up the slack from foreign official sales, the impact on the dollar may still be negative."