Data released by the US Treasury on Wednesday showed that foreign investors sharply reduced their holdings of US government debt in July, with the total falling by $50.4 billion from June to $9.25 trillion, marking the lowest level since October last year.
Among the major holders, France and Canada saw particularly pronounced declines, while Japan and China also trimmed their positions. In contrast, the UK significantly increased its holdings against the trend. It is worth noting that the Treasury's data on foreign ownership of US debt is influenced not only by actual buying and selling activity but also by valuation changes resulting from fluctuations in bond prices. Therefore, a monthly decline in holdings does not necessarily equate to an equivalent scale of net selling by overseas investors.
The US Treasury market itself performed weakly in July. Concerns over the Iran war escalating inflation risks and persistent worries about the US fiscal deficit made investors cautious toward long-dated bonds. The Bloomberg US Treasury Index fell more than 1% during the month, and the drop in bond prices further weighed on the book value of foreign holdings.
Japan's holdings fell to $1.1 trillion, with a decrease of $12.8 billion in July. As the largest overseas holder of US Treasuries, Japan's reduction drew attention. Notably, Japanese authorities took action to support the yen during the month. Subsequent data released by Japan's Ministry of Finance suggests that Tokyo may have sold some overseas securities to raise funds for currency intervention.
US Treasury Secretary Bessent linked Japan's Treasury holdings to its exchange rate intervention during a House hearing on Tuesday. He indicated that the rare joint intervention with Japan to buy yen on July 31 had a potential benefit of reducing Tokyo's need to sell US assets to prop up its currency. Bessent said: "A stronger yen means the Japanese government doesn't have to sell US assets to fund intervention." In other words, if the yen continues to face depreciation pressure, Japanese authorities may need to tap into some of their overseas securities to obtain the dollars required for market intervention. US assistance in buying yen could, to some extent, alleviate the pressure on Japan to sell US assets to raise dollars.
China's holdings decreased by $15.4 billion in July to $618 billion. In stark contrast to the reductions by Japan and China, the UK significantly increased its US Treasury holdings during the month. As the second-largest overseas holder, the UK added $58.4 billion, bringing its total to $998.3 billion, just shy of the $1 trillion mark. However, given the UK's massive international custody and financial intermediary business, its Treasury holdings data may not fully reflect the ultimate asset allocation of domestic UK investors.
France and Canada were major contributors to the overall decline in foreign holdings. French holdings of US Treasuries dropped sharply by $41.5 billion in July to $348.4 billion, while Canada's fell by $33.3 billion to $426.3 billion. Together, the two countries accounted for a combined reduction of $74.8 billion, exceeding the total $50.4 billion decline in overall foreign holdings for the month. The UK's substantial increase partially offset these declines.
Overall, July saw a clear divergence in the positioning of major overseas investors in US Treasuries: Japan, China, France, and Canada reduced their holdings, while the UK sharply increased its stake. These shifts occurred amid multiple pressures facing the Treasury market. Energy price and inflation risks stemming from the Iran war, along with concerns over the US fiscal deficit, have prompted investors to reassess the risk-reward profile of holding long-duration US debt. Meanwhile, Japan's currency intervention to stabilize the yen has also drawn market attention to its vast US asset reserves.
However, since the Treasury's holding statistics are simultaneously influenced by actual transactions, fluctuations in asset prices, and changes in custody locations, monthly data cannot be simply interpreted as a wholesale retreat by foreign investors from US debt. The future allocation shifts by overseas official and private investors in Treasuries will remain a key barometer of global confidence in US fiscal and interest rate prospects.
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