Allies are not buying anymore! U.S. Treasury purchases by pro-U.S. countries plunged 60% in the first eight months; Japan plummeted 99%, South Korea recorded net selling

According to Zhitong Finance APP, even Washington’s closest allies are no longer reliably footing the bill for America’s deficits.

Based on calculations from U.S. Treasury and State Department data, in the first eight months before 2026, nations and regions highly aligned with U.S. interests had a net purchase of $174.3 billion in U.S. medium- and long-term Treasury bonds, excluding short-term bills. This marks a new low since the same period in 2021—a year-on-year decline of over 60%.

This shift is particularly evident in Asia—economies that typically run large surpluses are reducing allocations of surplus funds into U.S. Treasuries. Japan, the largest foreign holder of U.S. Treasuries, made net purchases of only $389 million in the first eight months of this year, a 99% drop from a year earlier. South Korea became a net seller, offloading $23.8 billion, the largest scale of reduction since records began in 1977. Taiwan, China was also a net seller during the period.

This shift in capital flows has no single cause. Few governments have publicly stated an intention to exit U.S. bonds, and this statistical approach cannot distinguish between official and private investment activity within a country. Multiple factors have converged: weakening local currencies, rising domestic yields, increased attractiveness of equity assets, and market uncertainty over U.S. policy.

Masahiko Loo, Senior Fixed Income Strategist at State Street Global Advisors (with over $6 trillion under management) noted: “The U.S. Treasury market isn’t losing overseas buyers, but it is losing passive, automatic allocators. U.S. policy is increasingly unpredictable. That makes it difficult to justify large, structural over-allocations or the habitual recycling of surplus funds into U.S. Treasuries.”

U.S. government debt has climbed above $40 trillion, making the world’s largest economy increasingly dependent on investors to finance its expenditures. Meanwhile, Trump-era tariffs and policy uncertainty have fueled concerns about the long-term outlook for the dollar. From Japan to Europe, yields are rising, giving global investors more options than ever besides U.S. Treasuries.

It is known that Asian high-saving economies have traditionally converted trade surpluses into dollars and allocated them into U.S. Treasuries. This year, however, local currency depreciation has weakened their purchasing power, forcing countries to dip into their foreign reserves to stabilize currencies.

The yen has plunged to a forty-year low at times. Data shows that Japanese authorities sold some U.S. Treasuries and other securities this summer to support the yen. The won also saw its lowest levels since 2009, before rebounding somewhat.

Official guidance from these countries remains opaque. In May, a senior official from Japan’s Ministry of Finance stated that selling U.S. Treasuries to support the yen could backfire and acknowledged the risks of reducing holdings. In September, the Bank of Korea announced it would broaden the investments managed by local asset managers with part of its foreign reserves, no longer limiting them strictly to U.S. Treasuries.

Explanation of Statistical Approach

“Alignment” assessment may be subjective. This analysis (an update to a version first released in February) classifies countries as most aligned, least aligned, or neutral with the U.S., based on their frequency of voting alignment with the U.S. on key United Nations resolutions, using U.S. State Department data. This method is commonly used in academic circles to distinguish allies from adversaries.

For example, long-term military ally Australia is categorized as most aligned, while Mexico, the U.S. neighbor, is considered neutral.

The statistics refer to the net purchases (purchases minus sales) of U.S. Treasuries with original maturities over one year, covering 57 countries and regions and including both official and private investors.

Treasury Department data may assign securities held via custodians or intermediaries to the location of the custodian, rather than the ultimate ownership country. Thus, holdings and purchases attributed to financial centers such as the U.K. and Belgium may partly reflect investment from elsewhere.

More Asset Choices

Even if Asian capital flows abroad, U.S. Treasuries are not necessarily the default choice.

Brad Setser, Senior Fellow at the Council on Foreign Relations and former Treasury official, pointed out: South Korean funds prefer equities, while Taiwanese funds are shifting to equities and deposits. “So, some surplus economies are no longer major net buyers of U.S. Treasuries.”

Setser sees this as part of a broader dereservification trend: an increasing share of foreign assets that used to be held in central bank traditional reserves are now held by pensions, state banks, and other large institutions. This is not the same as de-dollarization, but it does reduce official demand for U.S. Treasuries.

Strategist Andrede Silva said: “The cost of dollar funding continues to rise, eroding U.S. Treasury returns. At the same time, Japanese government bonds now offer higher yields, improving local asset opportunities.”

Rising yields elsewhere are also offering investors new choices. Yang Joo Kyung, Head of Global Fixed Income at Korea’s Kiwoom Asset Management, said the firm remains cautious on Treasuries, viewing Japanese government bonds as more attractive.

Japanese investors also have more reasons to keep funds domestically. With local yields at multi-decade highs, the extra returns from investing abroad have narrowed considerably.

“Japan is a U.S. ally. We do see some signs of carry trades being unwound,” said Oliver Levingston, G-10 FX and Rates Strategist at BofA Securities. A carry trade involves borrowing yen at low cost and investing in higher-yielding foreign assets.

But this does not mean the U.S. will lack buyers. Private investors—including hedge funds, banks, and mutual funds—have already stepped in, raising their share of federal debt to about 70%, near the highest level since 1990.

However, they are more sensitive to pricing. For Treasury Secretary Scott Besent and Federal Reserve Chairman Kevin Walsh, this means markets could react sharply if investors become uneasy over monetary policy, economic conditions, the expanding U.S. deficit, or signals from the White House.

This heightened sensitivity has pushed the benchmark 10-year U.S. Treasury yield above 5% at times this year; as of Wednesday Asian trading, yields hovered near 5.01%.

Least Aligned Countries

From January to August, the countries most at odds with Washington made a collective net purchase of $17.1 billion in U.S. Treasuries, ending a four-year streak of net selling during the same period. However, this volume is only about a tenth of what pro-U.S. countries bought.

China remains the largest net seller, reducing holdings by more than South Korea. Belgium (whose holdings are believed to include some Chinese accounts) was the third largest net seller; the UK, Hong Kong, and India were the main net buyers.

“China’s continued selling is consistent with its long-term trend toward diversified allocation,” said Laura Cooper, London-based Head of Macro Credit at Nuveen.

In fact, this is not the first time American allies have exited the U.S. Treasury market. During the global liquidity scramble after the Covid outbreak in 2020, these countries also carried out large-scale U.S. bond sales.

Nevertheless, the $32 trillion Treasury market remains unrivaled in terms of depth, liquidity, and near round-the-clock trading—and the dollar continues to serve as the world’s dominant reserve currency.

As of August, foreign investors still held $7.85 trillion in U.S. Treasuries, near a historical high, but their market share has fallen from a peak of 52% in 2012 to less than one-third now.

“Globally, there are very few assets that can truly substitute Treasuries,” said Robert Tipp, Head of Global Bonds at PGIM. “That’s why some countries continue to rebalance and reduce holdings, but there’s always other money stepping in.”

Foreign capital is not abandoning U.S. assets altogether: Some flows are turning to U.S. equities and corporate bonds, indicating continued interest in American corporations, just less enthusiasm for Treasuries.

The new investors filling the gap are likely to demand greater risk premiums, no longer providing the steady, cost-insensitive funding that America’s allies once did.

Shoki Omori, Chief Fixed Income Strategist for Japan at Deutsche Bank, summed it up: “The U.S. can always complete its debt financing. The real variables now are the cost of funding and the volatility of interest rates. What can’t be bought with price alone is the patient, price-insensitive long-term capital once provided by old allies.”