Goldman Sachs: Selling US Treasuries May Indicate Continued Need for the US Dollar

Recently, the wave of U.S. Treasury selling has once again triggered market concerns about whether the global demand for the U.S. dollar is structurally diminishing. However, Goldman Sachs pointed out in a research report on Wednesday that this round of selling is highly consistent with historical foreign exchange reserve management behavior and does not represent a systematic withdrawal of countries from U.S. dollar assets.

Goldman Sachs strategist Isabella Rosenberg pointed out that the Iran war has driven up oil prices, impacting Asian energy importing countries, putting pressure on their currencies and foreign exchange reserves, and thus triggering a concentrated selling of U.S. Treasuries. But the logic behind this is exactly the opposite— "intervening in the foreign exchange market under a managed exchange rate mechanism usually indicates that policymakers intend to maintain the peg between their own currency and the U.S. dollar." In other words, selling U.S. Treasuries aims to stabilize their own currency, not to relinquish the U.S. dollar anchor.

Official data shows that the scale of U.S. Treasuries held by foreign countries has decreased in March, with Japan and China seeing the most significant decline. However, Goldman Sachs believes that to determine a real long-term threat to the demand for U.S. Treasuries, the key evidence should be that countries managing exchange rates start to shift reserves from the U.S. dollar to other currencies - no such signs are currently observed.

From the market performance perspective, the U.S. Treasury market has not experienced sustained pressure amid this wave of foreign selling, with swap spreads and other indicators stabilizing after the initial shock in March. Goldman Sachs points out that the depth and liquidity of the U.S. capital market, as well as the current lack of alternative assets capable of absorbing global reserve funds, remain the core factors supporting the demand for U.S. Treasuries.

Looking ahead, Goldman Sachs believes that once conflicts in the Middle East ease, a weaker U.S. dollar and decreased market volatility will re-strengthen foreign demand for U.S. Treasuries. On Thursday, the yield on the 10-year U.S. Treasury rose nearly 5 basis points to 4.5281%.