Jason Daw:
Hello and welcome to Macro Minutes. During each episode, we'll be joined by RBC Capital Markets experts to provide high conviction insights on the latest developments in financial markets and the global economy. Please listen to the end of this recording for important disclosures.
Jason Daw:
Hi, everyone, and welcome to this edition of Macro Minutes called Diversify the Buy, which we're recording on February the 18th. I'm Jason Daw, Head of North America Rates Strategy and the moderator for this week's episode. The first question is, why did we choose the title Diversify the Buy? Well, over the past year bond yields in the US have held various ranges. We're in the lower range that we've seen over the past year, and we're also now probing the bottom end of that range.
The US dollar, DXY, that was down 10% in 2025, and it's starting 2026 softer also, while gold is up massively in the past year and there's been heightened volatility recently. Now, despite the de-dollarization narrative, investors have continued to accumulate US dollar denominated assets, but definitely with a cautious bias, i.e. hedging, and to unpack these complexities, you're going to hear from various RBC experts to get their insights, so we have Blake Gwinn today, Head of US Rates Strategy, Richard Cochinos, FX Strategy, and Chris Louney, our Natural Gas and Gold Strategist.
Now, the first theme we're going to tackle is de-dollarization and flows. Blake, we've had some headlines the last few weeks – Danish Pension funds, a large European asset manager, Chinese banks that have suggested some large international investors might be taking a look at their US treasury allocations, so do you think this is just smoke or are you seeing any fire under the surface?
Blake Gwinn:
Well, if we consider fire actual evidence of outflows from foreign investors in the data, we're just really not seeing anything yet. In January, that's the most up-to-date data we have on treasury auction allotments. We basically see the foreign share of total treasury coupon auctions at 21%. That's the highest level since early '22, and that's been pretty spread out across the curve, so it isn't just like one sector and they're pulling away from another. It's pretty well-balanced across all the major benchmarks. If you look at something like TIC data, which shows foreign treasury ownership, that's a little bit more mixed, but overall it's been fine as well. If you look at it outright, total foreign ownership's been steadily increasing since yields peaked back in late 2023.
If you want to take a less generous view of that stat, you could look at those holdings in the context of overall treasury issuance, but even there, you're looking at a share of total US treasury's outstanding of about 36%, which is where it's been averaging for the last two and a half years. So, really not a lot of signs that foreign ownership, even as a percent of outstanding, has really been dropping. Now, to be fair, that data only goes through November, so it is possible that we've seen some big realignment in December, January into February. We'll get December data this week, so it's theoretically possible there's been some kind of major shift in the last few months, but with ten-year yields, only a few bips off the lows that we saw in November, I really just don't think you're seeing it in the pricing.
Looking specifically at a few of the major holders, you can kind of break out China holdings. Those have been steadily declining since 2018, and that's even after you take into account the holdings in Belgium and Luxembourg, which are pretty well understood to represent custody holdings out of China. Outside of the dip that we saw around Liberation Day last April, the rate of decline has been pretty fairly steady, so that's not really accelerating or showing any kind of pickup in that decline. Japan's another large holder. Their holdings have been rising pretty significantly since the end of 2024. Again, that data only goes to the end of November, so you might miss any possible flows that we saw around the spike in JGB yields in January, but with the February rally that we've had, long-end JGB yields are basically back to where they were at the time of that TIC data in November. I wouldn't expect there to be a large shift in that positioning either.
Also, if you look at the Japan's Ministry of Finance data, which shows net foreign bond purchases on a weekly basis and is a bit more timely, that has generally tracked Japan/USD holdings pretty closely, even though you can't really break out what currency or asset class those flows are happening in, but as I said, it does generally track Japanese holdings of treasuries. That really hasn't shown a lot of foreign bonds selling out of Japan in the last few months, so that's been pretty flat as well. Putting this all together, the headlines you mentioned, Jason, the rumblings we've seen about these Danish pension funds, some of those headlines out about China, at least at this point, it does seem to be mostly conversation, mostly smoke. We haven't really seen any signs of actual fire in the data around US Treasury holdings.
Jason Daw:
Okay, Blake. It sounds like this de-dollarization story is kind of a red herring for Treasury markets. Where do you see this narrative going? Is it just the beginning, you think?
Blake Gwinn:
Well, I actually like to use the word “narrative” there, because I think, from a near-term trading perspective and really the near-term yield outlook, the narrative is what really matters, not the actual flows. I do think de-dollarization has been happening for some time. It's going to continue to happen, but outside of a few very isolated incidents, if you remember back in April, May 2018, following some sanctions, Russia sold off a large portion of Treasury holdings, so you get some instances like this where you do see large sales flows out of foreign holders, but outside of that, it's really a long, decade type of story that's really moving at this glacial pace. That, alone, isn't going to create a lot of alpha. It's not really that tradable on a near-term timeframe. It's very interesting if we're talking a theoretical discussion around that decades long trend, but again, not really something you can trade in the near term. That's especially true when you think about the size and the depth of Treasury markets.
Even very large investors, leaning back a bit from US Treasuries, should be pretty easily absorbed. The size of those Treasury outflows could definitely be a lot more meaningful in recipient markets. You think about gold, I'm glad we have Chris on the call today, if you think of taking 50 billion out of Treasury markets, that doesn't really mean a lot. I think Treasuries could absorb that. You put it into gold, it might be a bit of a different story, because it could certainly be more of a price mover, but in terms of Treasury markets, what I'm really focused on more than the flows themselves is really that narrative around de-dollarization. If we remain in this kind of macro narrative vacuum that I think we're currently in, where you've got economic data that's basically moving kind of sideways, more or less fine, you've got the Fed on hold, it does make it a bit easier for these very long, very deeply held, and often kind of latent fears about deficits in supply and demand for Treasuries. It allows that to kind of creep to the surface, and that's especially true if yields are already selling off.
I think people can see those sell-offs, and then really starts to ramp up these fears, and keep would-be dip buyers from stepping in and moving against that, so that could exaggerate those types of moves, and we've seen that several incidents over the past few years where you have this kind of narrative vacuum, you have those concerns about whether it's deficits, supply and demand. In this case, the de-dollarization can drive things temporarily, but as soon as we kind of pull back to a narrative around the Fed, around the economy, that starts to dominate again. It did seem like this narrative was starting to bubble up a few weeks ago, particularly after that Greenland debacle, but with the rally we've had the last week and a half, both here and abroad, I think the increased focus we've had on US risk assets recently, that's likely nipped a bit of this in the bud for the time being, but I will say that this de-dollarization narrative kicking up again really still remains one of our primary upside-yield risks for 2026.
Jason Daw:
Okay. Thanks a lot, Blake. Shifting gears over to Richard in the currency market, so Richard, you've outlined structural headwinds to the dollar, whether that's reserve diversification, Japanese portfolio rotation, term premium dynamics, but the US still shows the strongest growth in the G10, and foreigners do continue buying US assets at a pretty good clip. How do you reconcile that contradiction, and what would force a material shift in those capital flows?
Richard Cochinos:
It's a great question, Jason. It really boils down to that it's a balance between the stock of assets owned and then the flow. Now, the market generally focuses on the flow data, whether this is the US Treasury's TIC data set, EPFR, or Morningstar. That's the marginal buying or selling of US assets and it's super timely. But in currency markets, these weekly or monthly asset allocation decisions get overwhelmed by the risk management of those underlying assets. Now, to give an example, we know from the TIC transactional data, the net foreign buying of US assets is currently, and that's both fixed income and equity, the run right is about $100 billion to $150 billion per month for the past six months. Now, foreigners own in total $36 trillion of US assets. If they raise their hedge ratios on those underlying stock by, say, half a percent, that's $180 billion in US dollar selling, which already supersedes the amount of asset buying that they're doing.
Now, that's from the foreigner's perspective. People often forget about the domestic side as well. US asset managers have over $80 trillion in assets under management, and of that, they own about $40 trillion in foreign assets, which we know from the international investment position. If domestics were to lower their hedge ratios on the foreign assets they own, say by 1%, then that's $400 billion and less dollar buying. The effect in FX markets is the same. You get a weaker dollar. If it's foreign owners buying less or hedging more of their US assets, or of domestics actually hedging less of their foreign ownership, the key point here is managing the risks on your existing stocks overwhelms the marginal asset allocation flow. So, in currency markets, we very much can get an environment where foreigners are buying US stocks, US treasuries, and the dollar still ends up weaker.
Jason Daw:
Okay. Thanks a lot, Richard. So, follow-up question, reserve managers have reduced dollar holdings by quite a bit over the past five years while accumulating assets in small, G10 currencies in gold. Is this a structural reallocation that persists through market cycles or is it episodic, and how would you distinguish between the two given the current geopolitical and monetary environment?
Richard Cochinos:
To answer succinctly, it's episodic, but the horizon of those episodes is probably longer than most realized. FX reserve portfolios are roughly $13 trillion in assets under management globally, and if you include gold, FX reserves plus gold equates to about $16 trillion for those FX reserve portfolios. Now, to put these portfolios in a comparable size, the total universe of European asset managers, they manage about 23 trillion of AUM. In the UK, again, all asset managers, $8 trillion of AUM, Canada, $8 trillion of AUM, the US, $80 trillion of AUM. So, FX reserve portfolios, they're large, but they should only be counted as just one among the source of currency demand. Think of them like a beta. Now, central banks started buying gold close to 2008 global financial crisis, and their demand has been mostly concentrated by emerging market central bank reserves.
Likely this trend was started due to the DM Central Bank response of using expanded balance sheets, the sovereign balance sheets, and the transfer of risk from private markets to the public sphere. Now, global M2, a percentage of GDP since 2008, has only continued to rise, so of course this is going to have an impact on price. What we've seen is all fiat currencies have depreciated with the diversification to gold.
On this FX specific portfolios, it's really no different. The dollar has fallen from 72% of portfolios to 56% currently. If you think about it this way, the US only contributes 24% to global GDP, but it's over half in terms of the global asset allocation. So, the question reserve portfolios are working through is, what should this weight be? Remembering, these portfolios are really about asset preservation and the diversification that's been happening under the hood for decades.
But to come back to your question, it is episodic and we do see an acceleration, both post 2016 and post 2023. For the last five years, this is annualized to about $120 billion per year of less dollar accumulation or dollar selling, and a very much accelerated of G10 small currencies buying. That's Canadian dollar, Chinese renminbi, the Scandinavian currencies, and the Australian dollar.
The last point I want to make here is just recognize in currency markets, liquidity really matters. The US dollar market can easily absorb $120 billion of dollar selling or less dollar buying, but the volume and the notional impacts on these smaller currencies, like the Canadian dollar, Australian dollar, the Scandinavian currencies, is significantly more, where they have either one fifth or less of the liquidity that we see in the dollar market.
Jason Daw:
Okay, great. Very insightful, Richard. Shifting gears again over to the gold market and Chris, so gold's been in the headlines obviously, but what has that meant in terms of investor flows? How supportive really is the undercurrent from investors, and how does the de-dollarization theme play into all that?
Chris Louney:
Thank you, Jason. Gold certainly has been in the headlines this year. It's been a busy start to 2026, and I think diversify the buy is arguably the undercurrent that is driving the positive investor flows that we've seen in gold markets year to date. As was mentioned, there's sort of a debate about smoke versus fire, in terms of no flows and other assets, as has already been discussed, but for a recipient market like gold, there is certainly fire. We've seen drips out of any other asset class if they're coming into gold, which they seem to be. It is a lot more meaningful for both flows and also the price discovery process. And so, when we're looking at the performance of investor flows in the gold market, they have continued to pile into gold. That much is clear.
If you were to look at 2025's inflows, where we saw total inflows actually manage to more than offset four years of net outflows as of 2025. In 2026, we've already seen over 100 tons of inflows as well. I'd say one interesting change, year-on-year, is while in 2025 it was led largely by North American listed exchange traded products, with also some strength in Asia and Europe. So far in 2026, the inflows have been led by Asia and especially China, and what this really tells us is that the world of investor interest in gold is quite broad based. This is really important if gold is to hold on to levels that we've already seen so far this year.
Generally, what is driving this? It's about the diversification. There's a bit of sort of de-dollarization embedded in there, and we're seeing gold benefit, whether it's sort of risk-off flows or also during risk-on periods. We're seeing these allocations be made to gold as a hedge. A lot of this is linked to gold's role as a perceived safe haven, the fact that it's stateless, it is no one else's liability, and also its performance, clearly, over the last year and now a few months into 2026, together justifying increased role in overall investor portfolios.
We've seen allocations really shift from either 0 or 2 to 5% among a lot of generalist portfolios to higher levels, and potentially 5 to 10% based on our conversations over the last year. It's clear I think that the investor inflows in gold markets seem pretty durable on the back of this diversification story, the macro environment, what we view as a key driver uncertainty leading to these ongoing inflows. So, we do think that this is important for the market holding onto these prices, and then when you compare it and add on central bank flows, you really get a pretty constructive nature, at least from the perspective of flows for gold markets overall.
Jason Daw:
Okay. Thanks for the insights, Chris. So, we're move on to the second theme in this podcast, the outlook for the three asset classes we've been discussing. To kick it off, Richard, super simple question for you, is the dollar going up or down this year?
Richard Cochinos:
Down, but let me emphasize, we are moderate in our expectations for 2026. The dollar was 8% lower already in 2025, and we had a 3% move weaker in just January of this year, so the direction of travel is pretty clear to us. If you want to put a number on it, for DXY, that's 94. Clients should keep in mind that the dollar is only part of its way through a multiyear weakening cycle. Now, these cycles happen every one to two decades. The dollar cycle, historically, has lasted from peak to trough 16 to 17 years. The corrections that we normally see on average is the dollar weakens 25%. There have been periods where this has been as high as 40% lower, but what really drives our conviction, we've highlighted in our research that the world really holds a passive overweight on US assets. Now, risk on these assets is rising.
You can see this through higher volatility, curve steepness, greater risk premium, all of which points to greater hedging on those underlying stock exposure I talked about earlier. Now, the knockout punch, and let me emphasize, there is a real embedded negative convexity built into these assets from a currency perspective. US assets were the highest yielding in 2022, 2023, 2024, and through about half of 2025, but that's changed, right? The US is no longer the highest yielding country in DM. It's actually fourth in that ranking and, depending on whether we do or do not get any additional Fed cuts, it may slip even further down, so the point is it's not going back. While a dollar trade shouldn't be expected to be linear, right? Dollar weakness doesn't happen every week or even every quarter, but you need to keep in mind, what are these long-term horizons that we're working with? And you need to definitely pick your points when building into a medium-term trend.
Jason Daw:
Okay. Good stuff, Richard. Chris, Gold that's been bouncing around quite a bit after reaching new record highs. What do these moves mean for gold going forward, and in particular, the recent volatility that we've seen?
Chris Louney:
That's an important question, I think, when we think about how gold should perform for the rest of 2026, and I think what we've seen already so far this year is actually quite instructive for what we should expect going forward. Our long-held view for gold for 2026 is that it should spend most of its time in the $4,500 to $5,000 per ounce range, a range that then grows closer towards your end with our Q4 high scenario, around $5,203, but in between grinding within that range, there is a potential to see ongoing volatility. We reached record highs earlier this year, which was then met by a sell off shortly after. We identified, in earlier research, that if we use 2025 as a proxy, you could see highs for gold as high as $7,100 in 2026, and so this type of volatility is something that we should probably expect going forward.
But again, using the macro justification for gold, even in this context of uncertainty, we do see the range, which gold has spent most of its time in already this year, as largely should be the prevailing range. This assumes both Richard's dollar outlook and Blake's outlook for the Fed. In putting this macro backdrop against the environment of uncertainty, we do see the potential for these volatile swings higher and then lower, but again, a justified range on an ongoing basis. Once we get around this $5,000 per ounce level, we see some fundamental justification for gold there, so there should be opportunities to layer into gold for those watching and waiting for a moment to layer in amid this volatility, but again, the cocktail of this gold-positive macro backdrop and uncertainty, I think, means a lot of volatility going forward, and applying what we've seen so far in 2026, I think, again, is instructed for the rest of the year.
Jason Daw:
Okay. Thanks a lot, Chris. Over to Blake, kind of wrapping a bow on the discussion here, what's your outlook for bond yields this year?
Blake Gwinn:
Yeah, so as Chris mentioned, we don't have any more Fed cuts forecast for the rest of this year. I think the labour market fears that really define the end of 2025 are going to continue to dissipate. We've already seen some stabilization, if not bounce back in the data we've received for January. I think you also have companies that are learning to live with tariffs. A lot of that uncertainty that was injected into the business environment April last year. There was a lot of back and forth. There were delays. I think that's starting to come a bit. People are getting back to business as usual. That is probably going to see activity hopefully pick up a little bit this year as well. Lastly, I think you have some very modest tailwinds from both fiscal policy and the Fed cuts that have already been delivered, that are continuing to work their way through the system, so that's all a long way of saying that, basically, I do think yields can move back into slightly higher ranges. Basically, where we were kind of trading.
If you want to think about tens, 425 to 450, that's where we were kind of trading before those labor market fears really picked up last summer. So I think we can go back to that range, but I do think the upside is really capped by this very persistent insurance premium that's being demanded by investors for the skew and the risk around the Fed. Namely, that there is still this tail risk possibility that we get much deeper cuts this year, while on the other side there's almost no probability of hikes really being priced in. There's a lot of distance that would have to be crossed before we start thinking about hikes, so that skew in the distribution of outcomes does keep a pretty persistent pricing for at least one or two cuts into terminal, and I think, with it, anchors how far we can really sell off across the rest of the curve. So yeah, that's kind of where we're at. Slightly higher ranges, no Fed cuts for this year and probably curve staying more or less inside of the ranges that we've seen more recently.
Jason Daw:
Okay. Thank you to our listeners for joining this episode of Macro Minutes. The cross currents on the de-dollarization theme and its impact on currencies, gold and US treasuries, that will remain an important point for investors through 2026, so please reach out to us directly or via your RBC sales representative for any follow-ups.
Speaker 5:
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