Foreign holdings of US Treasuries fell to $9.3 trillion in June, with Japan, China and the UK leading the decline even as overseas investors continued to pour money into US equities and corporate bonds.
Foreign holdings of US Treasury securities fell in June, led by sharp declines from Japan, China and the UK, highlighting a notable shift in the composition of global investment flows even as overseas investors continued to increase their exposure to US equities and corporate bonds.
Data released by the US Treasury Department showed total foreign holdings of US Treasuries slipped to $9.299 trillion in June, from $9.371 trillion in May. Despite the monthly decline, foreign-owned Treasuries remained 2.3 per cent higher than a year earlier.
Japan recorded the biggest decline among major holders. Its Treasury holdings fell 2.3 per cent to $1.116 trillion in June from $1.143 trillion in May. Japan nevertheless remained the largest foreign holder of US government debt, although its holdings are well below the record $1.325 trillion reached in November 2021.
The UK, the second-largest foreign holder, reduced its holdings by about 1% to $939.9 billion, from $948.6 billion in May. The UK also serves as a major custody centre for global investors, meaning changes in its Treasury holdings can partly reflect the positioning of international investment funds rather than purely British investment decisions.
China recorded the sharpest percentage decline among the three major holders. Its Treasury holdings fell 4 per cent to $633.4 billion in June from $659.3 billion in May, taking them to their lowest level since September 2008. On a year-on-year basis, China’s holdings have declined by more than 13 per cent.
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The decline comes against a backdrop of changing global capital flows and heightened sensitivity around US assets. Treasury securities remain a core reserve asset for central banks and institutional investors, but shifts in interest rates, currency strategies, reserve management and expectations around US fiscal and monetary policy can influence the pace at which foreign investors accumulate or reduce them.
China’s prolonged reduction in Treasury holdings is particularly significant. Beijing has been gradually reducing its exposure to US government debt for years, with its holdings now far below their previous peak. The move can reflect broader reserve diversification as well as changes in China’s foreign-exchange management strategy.
Japan’s reduction is also closely watched because Japanese investors are among the world’s largest pools of overseas capital. Changes in US Treasury yields, the yen-dollar exchange rate and the relative attractiveness of Japanese assets can influence demand for US government securities.
The UK data, meanwhile, needs to be interpreted more cautiously because London is a major global financial and custody hub. A decline in UK-attributed holdings does not necessarily mean UK investors themselves sold an equivalent amount of Treasuries.
US equities attract more foreign capital
The Treasury decline also stands out because foreign investors continued to direct substantial capital towards other US assets.
Foreign purchases of US equities reached $181.4 billion in June, while US corporate bonds attracted $35.6 billion. Treasury inflows, by comparison, were just $6.8 billion**, sharply lower than the $56.6 billion recorded in May.
Overall net foreign capital inflows into the US stood at $133.5 billion in June, slightly above $131.5 billion in May.
The numbers therefore point less to a wholesale retreat from US assets and more towards a shift within US asset allocation. Investors may be reducing exposure to government debt while maintaining or increasing exposure to equities and corporate credit.
For markets, the key question is whether the June decline marks a temporary adjustment or the beginning of a more persistent change in the way major foreign investors allocate their reserves and capital. A sustained reduction in demand for Treasuries could have implications for US borrowing costs, the dollar and global bond markets, particularly at a time when the US Treasury market is absorbing large government financing needs.
