THE ESCALATION of the US-China trade conflict has heightened investor focus on the upcoming breakdown of the Federal Reserve’s assets for fresh signs that the Asian nation may be trimming its Treasury pile.

The specter of China, the world’s biggest foreign holder of US government debt, stepping back from Treasuries in retaliation against President Donald Trump’s negotiation tactics was already raised this week by a lackluster benchmark note auction. That, like in past episodes of angst with China as well as Russia, has strategists eyeing if the Fed’s Thursday release will reveal that its coffers of Treasuries held for foreign central banks slid.

The Fed report will detail its balance sheet and include the amount of US government bills, notes and bonds it holds in custody for foreign central banks. For the week ended May 8, custody holdings fell $670 million to $3.06 trillion. That is down from $3.08 trillion in March and a record $3.11 trillion a year earlier. While the figures don’t give a breakdown of who’s buying or selling, traders often speculate which nation is driving the change.

“We’ve seen this before ahead of possible confrontations with the US — foreign central banks moving their custody holdings,” said Sebastien Galy, senior macro strategist at Nordea Investment Funds. “The message, if we see declines, is that they are moving their assets to cash given they expect the conflict to last for several months.”

Wednesday’s 10-year debt auction had a low participation by a category of bidders that includes foreign and international monetary authorities. Yet most saw low yields as the likely culprit for the below-average overall demand.

Separate data from the US Treasury, which comes out with an over one-month lag, shows that China’s Treasury debt rose in February — a third straight increase. The amount remains, however, well below a record $1.32 trillion in 2013 (America’s debt has risen nearly $5 trillion over that time). China’s foreign-exchange reserves have fallen from a record $4 trillion in 2014.

Still, Galy, who began his over decade-long career in markets at the Bank for International Settlements, says he suspects China may be shedding Treasuries, and he’s waiting for confirmation from the Fed report.

The auction statistics “suggest that some large emerging country increased their cash-like war chest” to be able to deal with “a period of turbulence,” Galy said. — Bloomberg