Although equity investors have been adjusting their regional allocations away from the US dollar in recent months, there is little sign this is happening in bond markets, where yields remain high and alternatives to the dollar are limited.

Central banks have been diversifying their FX reserve exposure from the US dollar since 2018. In our view, it is unlikely there will be significant further reductions in US dollar FX reserves as there are not many alternatives.
 

Gold has benefited from the current volatility in the US Treasury (UST) market as it has been perceived as safe-haven asset, but it remains very volatile which limits its ability to represent a large component of the FX reserves. On the other hand, the euro can be considered an alternative to UST but the size of the high-quality German government bond market (€1.5trillion) remains a fraction of the UST ($14trillion), limiting its use.
 

Therefore, while central banks will likely continue to gradually diversify their FX reserves, the structural limitations of any alternative should lower the risk of direct sales of UST.
 

Meanwhile, credit markets are also dominated by the US dollar. Even the most geographically diverse fixed income market, global investment grade corporate, is 66% US dollar denominated. This figure itself is deceptive, with a large portion of euro issuance – the second highest currency – in the financials sector.