(Repeats Friday's story without changes)
By Jamie McGeever
LONDON, Sept 21 (Reuters) - Few have flexed their muscles in the U.S. bond market over the last 15 years quite like foreign central banks, who have played a major part in the bull run by recycling their trade surpluses and building up trillions of dollars of currency reserves.
But that was when bonds were rising. They may be powerless to fully protect their vast holdings of U.S. Treasuries when the market turns and prices start falling, a long process that many observers say we are in the early stages of right now.
A fall in the price of U.S. bonds will wipe tens or even hundreds of billions off the value of central banks' holdings, but trying to get out and sell early is dangerous because that would almost certainly accelerate the decline.
These institutions aren't short-term traders, they're long-term investors who don't react in a knee-jerk fashion to market moves. When it comes to their FX reserves, stability and capital preservation are paramount.
Yet the list of reasons why they might want to loosen their ties to the U.S. dollar, bonds and financial ecosystem in general is growing. Especially if the current Treasuries sell-off proves to be the start of a proper reversal.
The focus is on China, which holds $1.2 trillion of U.S. Treasuries. But there are smaller holders - "free riders", as economist Nouriel Roubini once dubbed them - who collectively pack a powerful punch.
Algeria and Turkey, for example, each hold around $100 bln of FX reserves, and Iran has over $130 bln. Many smaller holders will have their Treasuries in custody centres such as London or Luxembourg.
China selling, or just not buying more U.S. bonds, would be a significant development, pushing up U.S. borrowing costs and potentially denting U.S. growth. Similar behaviour from Roubini's free riders could have a similar impact too.
You can see why they might consider it. Many could join China and get sucked into trade disputes with Washington, some may want to reduce their dependency on the dollar, and others might want to distance themselves from an increasingly hostile and unpredictable U.S. administration.
But they will be mindful of the damage that could do to their stash of Treasuries, borrowing costs, and GDP growth.
"They are limited in that any damage they do to the U.S. will rebound both on themselves and on other countries. So a bit of an own goal," said Steven Englander at Standard Chartered.
THE TIES THAT BIND
The stakes are huge. Global foreign exchange reserves total $11.59 trillion. Most of that is held by emerging markets, including oil producers.