A recent report from Bank of America indicates that since March 2025, foreign central banks have continuously sold off U.S. Treasury securities, revealing "cracks" in investor interest in U.S. dollar assets. This trend not only heightens concerns about the sustainability of U.S. finances but also sets the stage for a repricing of global assets, with gold and the stock market likely to be the main beneficiaries of this capital shift.
Data from a team led by Bank of America strategist Meghan Swiber shows that as of the week ending June 11, the average weekly reduction in U.S. Treasuries held by foreign official institutions in custody at the New York Fed was $17 billion, with a cumulative decrease of $48 billion since late March. Simultaneously, foreign investments in funds held through the Federal Reserve's reverse repurchase agreements have significantly declined, with a reduction of over $15 billion.
In its report titled "Cracks in Foreign Demand for U.S. Treasuries," Bank of America noted that this situation is quite unusual. Typically, when the dollar weakens, foreign investors increase their holdings of U.S. Treasuries to secure returns. However, despite the ongoing weakening of the dollar index, central banks worldwide are reducing their holdings of U.S. Treasuries against the trend, reflecting a diminishing attraction of the dollar as a global reserve currency.
Gold May Gain New Upward Momentum
As the appeal of U.S. dollar assets diminishes, the safe-haven allure of gold is quietly returning. Since 2025, gold prices have repeatedly challenged the critical $2,300 per ounce mark, showing strong performance in the context of the Federal Reserve maintaining rates and rising inflation.
Liquidity released from foreign sales of U.S. Treasuries may partly flow into precious metals markets to hedge against the risk of dollar depreciation and potential volatility in U.S. Treasuries. Notably, Asian central banks, especially those of China and India, have been steadily increasing their gold reserves in recent years, shifting their asset allocation strategy away from U.S. Treasuries towards more "apolitical" tangible assets.
U.S. Stocks May Face Short-term Pressure, Long-term See Capital Rotation
During the capital shift process, U.S. stock performance will be influenced by two opposing forces. On one hand, rising U.S. Treasury yields may suppress the valuation of growth stocks. On the other, a weakening dollar could enhance the outlook for U.S. companies' overseas revenue, benefiting export-oriented firms within the S&P 500 index.
However, strategists warn that the structural reduction in foreign holdings of U.S. Treasuries likely signals a lack of trust in U.S. economic policy. The report mentioned that the Trump administration's trade protectionism and continuously expanding fiscal deficits are creating a repelling effect on global capital, with the so-called "short America trade" gaining increasing consensus.
Ripple Effects on Global Markets
This weak demand for U.S. Treasuries is not confined to the U.S. and should not be underestimated in terms of its global impact. Assets in developing countries, particularly emerging market bonds and stocks, stand to benefit from valuation recovery opportunities as global capital seeks higher returns and diversification of dollar risk.
At the same time, the performance of non-sovereign assets such as gold and bitcoin deserves continuous attention. If market risk aversion persists, precious metals and digital assets could see dual-driven upward momentum.
Conclusion
This report from Bank of America serves as a warning bell for global investors: the "unconditional faith" in dollar assets is facing unprecedented challenges. As capital gradually exits the U.S. Treasury market, a new round of asset price reevaluation is underway, with gold, emerging markets, and high-quality stocks likely to emerge triumphant in this global asset reshuffle.
