Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How Emerging Market Central Banks Are Dumping US Treasuries
Transcript
- Lucas: So the big story in emerging markets this week isn't about a single country or a single stock — it's about what central banks are doing with their foreign exchange reserves. And the headline is this: EM central banks are selling US Treasuries at the fastest pace we've seen in decades. Luna: I've seen the headlines about China reducing holdings, but you're saying it's broader than that? Lucas: Much broader. Let me give you a few numbers. China's holdings of US Treasuries have dropped below $800 billion for the first time since 2009. That's a roughly 30 percent decline from the peak around 2013. But it's not just Beijing. India, Brazil, South Korea — all major holders — have been net sellers over the past 12 months. Luna: Why now? The dollar is strong — you'd think central banks would want to hold the world's reserve currency when it's appreciating. Lucas: That's exactly the paradox. The dollar index is at 120.5 as of last Friday. That's near a two-decade high. And the strong dollar is actually hurting EM central banks in two ways. First, it's crushing their own currencies — the yen is at 162 per dollar, the yuan is at 6.78. That forces them to intervene to support their currencies, which means they need to sell dollars, including Treasuries, to raise cash. Luna: So it's partly forced selling to defend their currencies? Lucas: Exactly. But there's a strategic element too. Central banks are looking at the US fiscal trajectory — deficits north of 6 percent of GDP, debt to gdp over 120 percent — and they're thinking, 'Do I really want to be financing this indefinitely?' So they're diversifying. A lot of that money is going into gold. Central bank gold purchases hit a record last year, and they're on pace to break it again this year. Luna: Gold makes sense as a non-political, non-sanctionable asset. But what about the yuan? I've seen some commentary that China is pushing its currency as an alternative. Lucas: The yuan is a factor, but it's still small. Yuan-denominated bonds now account for about 6 percent of global reserves. That's up from basically zero a decade ago, but still dwarfed by the dollar's 58 percent share. Still, countries like Russia, Iran, and even Saudi Arabia are doing more trade settlement in yuan. And China has bilateral swap lines with over 30 central banks. So it's a gradual shift, not a revolution. Luna: I want to zoom in on one country: India. The Reserve Bank of India has been a particularly active seller of Treasuries. What's their motivation? Lucas: India's situation is interesting. They've built up reserves aggressively over the past decade — they have over $600 billion in foreign exchange reserves. But they're also running a current account deficit, and the rupee has been under pressure. So they've sold about $15 billion in Treasuries over the past year to stabilize the rupee. But they're also buying gold — the RBI added 200 tons of gold to reserves in the last two years alone. Luna: So it's a mix of short-term currency defense and long-term diversification. How is the US Treasury market reacting? With all this selling, shouldn't yields be going up? Lucas: You'd think so, but it's complicated. Foreign holdings of US Treasuries are still around $7.5 trillion. The EM selling is being offset by domestic buyers — US pension funds, insurance companies, and the Federal Reserve. Plus, Japan and the UK are still big buyers. So the impact on yields has been muted so far. But if the selling accelerates, it could become a factor. The ten-year Treasury yield is around 4.2 percent today. If EM central banks dump another $200 billion, that could push it higher. Luna: That would have knock-on effects for emerging markets themselves. Higher US yields mean higher borrowing costs for EM governments and corporations. Lucas: Right. It's a feedback loop. EM central banks sell Treasuries to defend their currencies, which pushes US yields up, which makes EM debt more expensive, which puts more pressure on their currencies. That's the vicious cycle we're seeing play out in countries like Argentina, Turkey, and even parts of Southeast Asia. Luna: I want to talk about the elephant in the room: China. They're the largest foreign holder of Treasuries after Japan. If they accelerate selling, could it trigger a crisis? Lucas: It's possible, but I think Beijing is being strategic. They're not selling aggressively — they're gradually reducing, while also buying gold and other assets. They don't want to crash the Treasury market because they still hold a massive amount. A crash would hurt their own portfolio. So it's more of a slow-motion diversification. But there's a geopolitical angle too: with tensions over Taiwan and trade, holding fewer US assets gives China more leverage. Luna: Let's talk about what this means for the dollar's reserve currency status. Is de-dollarization actually happening, or is it overhyped? Lucas: It's real but slow. The dollar's share of global reserves has fallen from about 70 percent in 2000 to 58 percent today. That's a significant decline, but it's been very gradual. And it's not just EM central banks — even some developed countries are diversifying. But the dollar still dominates trade invoicing, currency trading, and debt issuance. So reports of its death are greatly exaggerated. Luna: One more data point: Brazil's central bank has been selling Treasuries too, and they've also been increasing gold reserves. What's driving Brazil specifically? Lucas: Brazil is interesting because they have a very active central bank that's been vocal about diversification. They've increased gold holdings from near zero to about 65 tons over the past three years. They're also increasing reserves in yuan and other currencies. They see the strong dollar as a risk to their exports, and they want to reduce dependency. Plus, with the political shifts in Brazil, there's a desire to align more with BRICS partners. Luna: So if you're an investor in EM stocks or bonds, how should you be thinking about this trend? Lucas: I think it's a signal that the era of the ever-strong dollar may be waning. Not collapsing, but the tide is turning. For EM equities, a weaker dollar is generally bullish — it makes exports cheaper, reduces debt servicing costs, and attracts capital flows. So this central bank selling could actually be a contrarian indicator that the dollar is near a peak. But in the short term, the selling itself adds to volatility. Luna: It's a long-term shift that creates short-term turbulence. Speaking of which, I noticed that the Chinese internet stocks in the KWEB ETF are down nearly 4 percent over the past five days. Is that related to reserve diversification or something else? Lucas: That's more about regulatory fears and slowing growth. The KWEB is down 3.7 percent over five days, while the broader EM ETF EEM is up 1.2 percent. So there's divergence within emerging markets themselves. China is struggling, while Brazil and South Korea are doing relatively well — EWZ is up 3.4 percent, EWY up 4.1 percent. So the central bank story is just one piece of a larger puzzle. Luna: And we should note that the data we're discussing — like the dollar index at 120.5 and the yuan at 6.78 — is as of last Friday. These numbers move fast, so listeners should check current levels. Lucas: Absolutely. Now, I want to bring this back to the human level. These are not just abstract flows — they affect real economies. When a central bank sells Treasuries, it's often because they're trying to prevent a currency crisis that would raise the price of imported food and fuel for ordinary citizens. So there's a real cost to this diversification. Luna: That's a good point. And it reminds me of something — this podcast is ad-free, and we like it that way. We don't run commercials, and that's a deliberate choice. If you find value in these deep dives, there's a simple way to support the show: buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash f-e-x-i-n-g-o. It helps us keep doing what we do, without selling your attention to advertisers. Lucas: Exactly. And we really appreciate those of you who do contribute. It makes a difference. Now, back to the big picture — I want to ask you, Luna, what's the one thing you think listeners should take away from this episode? Luna: I think it's that the world is quietly rebalancing. The US dollar is still king, but the foundation is shifting. Emerging market central banks are voting with their feet, and that has implications for everyone — from bond traders to policymakers to anyone with a savings account. It's a trend worth watching closely. Lucas: Well said. And we'll be watching it. Thanks for listening, and we'll catch you on the next episode.