Synopsis:

Bank of America highlights the importance of monitoring upcoming data on foreign demand for U.S. Treasuries (USTs), including Fed custodial holdings, Japanese flows, and indirect bids at auctions, to gauge whether the post-tariff USD-UST yield relationship will persist.

Key Points:

• FX Hedging Trends:

  • Foreign UST holdings tend to be more FX hedged than equities.

  • However, hedge ratios remain lower than historical norms, especially among Japanese life insurers.

  • Central bank reserve holdings are typically unhedged, adding sensitivity to FX dynamics.

• Recent Activity Pre-Tariff:

  • Foreign demand was already soft ahead of the tariff announcement.

  • This was reflected in a small decline in Fed custodial holdings and stagnant Japanese purchases.

• Focus for Next Week:

  • New custodial data and Japan flow figures will help reveal the tariff impact.

  • The indirect bid at upcoming UST auctions will serve as a key proxy for assessing foreign investor appetite.

Conclusion:

With USD under pressure and UST yields reacting to global risk-off flows, next week’s foreign demand indicators could be pivotal in determining if global investors continue to support the U.S. bond market—or if further dislocation between FX and rates is on the cards.