'Cracks' are forming in foreign demand for US Treasury bonds, BofA says

• Foreign investors are reducing US Treasury holdings, signaling future bond volatility, BofA said.
• Foreign demand for Treasurys is atypically low despite a weaker US dollar and .
• Concerns over US debt and tariffs are driving investors to diversify away from US assets.

Foreign buyers of US Treasurys have been shedding their holdings, raising the possibility of more future turbulence for US government bonds, Bank of America titled said.

In a report on Monday titled "Foreign UST Demand Shows Cracks," the bank said that foreign investors, often central banks, are purchasing fewer Treasurys.

Megan Swiber, rates strategist at Bank of America, wrote on Monday that US dollar asset holdings have declined over $60 billion since the beginning of April. Foreign participation in the most recent US 20-year Treasury auction was the lowest since July 2020.

"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 wrote.

Specifically, custodial holdings, or US Treasurys that foreign central banks hold at the Federal Reserve, dropped by $17 billion in the last week and are down $48 billion from late March.

The Fed is also conducting fewer reverse repurchase agreements, which could point to lower demand for Treasurys among global central banks.

A reverse repurchase agreement allows institutions to lend cash overnight to the Fed in exchange for high-quality collateral, usually in the form of short-term US government bonds. Reverse repurchase agreement balances have declined $15 billion since late March, according to the bank.

As seen in the chart below, demand for Treasurys in Q1 of 2025 primarily came from broker-dealers and foreign investors, a trend that may now be reversing.

Decreased foreign demand is atypical in times of heightened economic uncertainty and a weak dollar. Usually, central banks buy up US government debt when the dollar falls versus rivals — which has been the case this year with the US dollar index down over 9%.

Additionally, historically low interest rates in other parts of the world have led foreign investors to jump into the US Treasury market in pursuit of higher yields, Torsten Sløk, Apollo's chief economist said recently. As a result, foreign investors have accumulated record-high exposure to US government bonds with a maturity of over 10 years, meaning that any adjustments they make to their holdings will have an outsize impact on the bond market.

BofA said that it appears now that foreign investors are cutting back on their US Treasury investments, as deficit concerns and general growth worries stemming from tariffs and the tax bill hurt their appeal as safe-haven assets.