Overseas investors reduced their holdings of U.S. Treasury bonds by $50.4 billion in July; both Japan and China cut holdings, while the UK increased holdings against the trend

According to Zhitong Finance APP, data released by the U.S. Treasury Department on Wednesday showed that the size of U.S. Treasury bonds held by overseas investors fell significantly in July, down $50.4 billion from June to $9.25 trillion, the lowest level since October last year. Among them, France and Canada saw particularly significant decreases in holdings, while Japan and China also reduced their U.S. Treasury holdings, whereas the UK substantially increased its holdings against the trend.

It is important to note that the U.S. Treasury Department’s data on foreign holdings of U.S. Treasury bonds is not only affected by actual buy and sell activity but also includes valuation changes caused by bond price fluctuations. Therefore, a single month's decline in holdings does not necessarily equate to foreign investors selling the same amount of U.S. Treasuries on a net basis.

The U.S. Treasury market itself was weak in July. Investors became more cautious about long-term bonds due to the inflation risks intensified by the Iran war and ongoing concerns over the U.S. fiscal deficit. The Bloomberg U.S. Treasury Index fell by over 1% in July, and the drop in bond prices also dragged down the book value of overseas holdings.

Japan’s Holdings Drop to $1.1 Trillion; Currency Intervention May Be Driving Its Reduction in Overseas Assets

As the largest foreign holder of U.S. Treasuries, Japan’s holdings decreased by $12.8 billion in July, falling to around $1.1 trillion. Notably, Japanese authorities took action in July to support the yen. More recent data released by Japan’s Ministry of Finance suggests that Tokyo may have sold some overseas securities to raise the funds needed for foreign exchange intervention.

U.S. Treasury Secretary Besant also linked Japan’s U.S. Treasury holdings with its currency intervention during a hearing at the U.S. House of Representatives on Tuesday. He noted that on July 31, the U.S. rarely joined Japan in the market to buy yen, with one potential benefit being that it could lower the need for Japan to sell U.S. assets to support its own currency. Besant stated: “A stronger yen means the Japanese government doesn’t need to sell U.S. assets to finance foreign exchange intervention.”

In other words, if the yen continues to face depreciation pressure, Japanese authorities may have to use some of their overseas securities assets to obtain dollars needed for market intervention; conversely, U.S. support in buying yen could somewhat ease Japan’s need to sell U.S. assets to raise dollars.

China’s Holdings Drop by $15.4 Billion; UK Increases Holdings Against the Trend to Nearly $1 Trillion

U.S. Treasury Department data show that in July, China’s holdings of U.S. Treasuries decreased by $15.4 billion to $618 billion.

In stark contrast to the reductions by Japan and China, the UK sharply increased its U.S. Treasury holdings in July. As the second-largest foreign holder of U.S. Treasuries, the UK grew its holdings by $58.4 billion during the month to $998.3 billion, just a step away from $1 trillion.

However, because the UK financial market has a large international custody and financial intermediation business, the U.S. Treasury holdings data for the UK do not necessarily fully represent the ultimate asset allocation of UK domestic investors.

France, Canada See Significant Declines in Holdings

Looking at changes among major overseas holders in July, France and Canada were important sources of the overall decrease in foreign U.S. Treasury holdings.

France’s holdings of U.S. Treasuries dropped by $41.5 billion in the month to $348.4 billion; Canada’s holdings fell by $33.3 billion to $426.3 billion. The combined drop for France and Canada reached $74.8 billion, which exceeds the total $50.4 billion decline in foreign holdings that month, with the UK’s large-scale increase offsetting some of the decrease.

Overall, in July, the holdings of U.S. Treasuries by major overseas investors diverged markedly: holdings from Japan, China, France, and Canada fell, while the UK sharply increased theirs.

This shift comes as the U.S. Treasury market faces multiple pressures. Energy price and inflation risks resulting from the Iran war and the issue of U.S. fiscal deficit are causing investors to reassess the risk-reward balance of holding U.S. Treasuries long-term. Meanwhile, Japan's foreign exchange intervention to stabilize the yen has also brought its massive U.S. asset reserves under market scrutiny.

However, because U.S. Treasury Department holdings data are affected by real transactions, asset price changes, and changes in custody location, a single month's data cannot be simply interpreted as a broad-scale foreign investor exodus from U.S. Treasuries. The future allocation changes by overseas official and private investors in U.S. Treasuries will remain an important indicator for assessing global confidence in the outlook for U.S. fiscal and interest rate policies.