Official US data shows that in August of this year, overseas funds returned to the US Treasury market, but the allocation directions of major overseas holding countries and regions remained divergent. Among the top three "creditors," Japan and mainland China continued to reduce their holdings, while the UK's holdings continued to set new records.
The US Department of the Treasury released its International Capital Flow Report (TIC) on Friday, the 16th, Eastern Time, disclosing that overseas investors net purchased $108.9 billion in US Treasuries in August, reversing the selling momentum of a net $3.6 billion sell-off in July. Based on holdings balances, the total scale of US Treasuries held by overseas investors increased by $83.3 billion month-over-month in August, rising to $9.3317 trillion.
Among the major holding countries and regions of US Treasuries, the UK's holdings exceeded $1 trillion for the first time in history, while Canada and Belgium also significantly increased their holdings. However, the return of overseas funds to the US Treasury market does not mean that all major holding countries are increasing their allocations. Japan's holdings have continued to decline since May, coinciding with the period of the Japanese government's intervention actions of selling US dollar assets to buy yen, while mainland China has continued its long-term trend of reducing holdings.
Japan's Record-Scale Forex Intervention, US Dollar Asset Allocation Under Scrutiny
According to TIC data from the US Department of the Treasury, Japan's holdings of US Treasuries decreased by $35.6 billion month-over-month in August to $1.0683 trillion, remaining the largest overseas "creditor" of the United States.
According to the TIC report, Japan's US Treasury holdings have declined for four consecutive months. Previously, holdings in June and July consecutively hit new lows since January 2025, and in August they further fell to the lowest level since December 2024.
As Japan's holdings continue to shrink, the Japanese government has intervened in the foreign exchange market multiple times this year to try to support the yen, and the market is therefore paying attention to whether forex intervention affects Japan's US dollar asset allocation.
Data released by Japan's Ministry of Finance on May 29 shows that during the period from April 28 to May 27, Japan's total foreign exchange market intervention amounted to 11.73 trillion yen. Analysts believe that Japan's transactions of buying yen and selling dollars may involve a certain scale of US Treasury sales.
Thereafter, Japan and the United States also rarely jointly intervened in the forex market. Japan's Ministry of Finance confirmed on August 3 that the Japanese government and the US Department of the Treasury coordinated and implemented a yen-buying exchange rate intervention on July 31 to curb recent violent fluctuations in the yen exchange rate. This was the first coordinated forex intervention by Japan and the United States since the Great East Japan Earthquake in 2011, and an extremely rare joint action outside special periods such as financial crises.
Data subsequently released by Japan's Ministry of Finance shows that during the period from July 30 to August 26, the Japanese government invested a total of approximately 15.4 trillion yen to intervene in the foreign exchange market, setting a new record for a single month's intervention amount.
Intervening in the forex market usually requires selling foreign currency and buying yen. Since Japan's foreign exchange reserves hold a large amount of US Treasuries, the market is therefore paying attention to whether Japan will provide funds for intervention actions by selling US dollar assets such as US Treasuries.
However, TIC data cannot directly prove how many US Treasuries Japan sold to intervene in the forex market. Changes in holdings balances are affected not only by actual buying and selling but may also be affected by valuation factors such as bond price changes, and the $35.6 billion decrease in Japan's August holdings cannot all be attributed to forex intervention.
China's Holdings Decline for Three Consecutive Months, Two Consecutive Months Setting New Eighteen-Year Lows
According to the TIC report, the scale of US Treasuries held by mainland China in August decreased by $27.3 billion month-over-month to $590.7 billion, setting a new low since August 2008 for two consecutive months and continuing to rank as the third-largest overseas creditor of the United States.
As of August, mainland China's US Treasury holdings have declined for three consecutive months, and in the most recent 12 months, holdings have declined month-over-month in ten months.
From a longer-term perspective, the scale of US Treasuries held by mainland China has clearly decreased compared with the past. Around 2016, mainland China's holdings once exceeded $1 trillion, and now they have fallen to about $590 billion, reflecting the continuing trend of contraction in official holdings.
At the same time, discussions have recently emerged in the market about China possibly holding some US bonds through third locations. According to a report on Wednesday of this week, some Wall Street investors and analysts suspect that China may hold some US bonds through financial institutions in places such as Canada. The related discussion is connected to the increase in Canada's holdings of US Treasuries and related agency bonds in recent years.
However, there is still no conclusive evidence for this claim. The rise in Canada's holdings cannot directly prove that it includes assets transferred from China, and it may also be affected by allocation changes by other investors.
Therefore, the continuous decline in mainland China's holdings is a trend that can be confirmed by TIC data, but based only on publicly disclosed holdings data, it still cannot be asserted that the full scale of US bonds actually held by China has declined simultaneously.
Canada Leads Increases, Belgium's Holdings Also Surge
Among the top ten overseas countries and regions holding US Treasuries in the TIC report, only Japan and China saw their holdings decrease in August. The UK, whose total holdings are between those of China and Japan, increased its holdings for two consecutive months.
Data shows that the scale of US Treasuries held by the UK increased by $11.2 billion month-over-month to $1.0095 trillion, breaking through $1 trillion for the first time on record, setting a record high for two consecutive months and continuing to firmly rank second on the TIC report's list of overseas "creditors."
Canada and Belgium showed even more prominent increases. Canada's US Treasury holdings in August increased by $38.3 billion month-over-month to about $464.6 billion, the largest increase among the top ten overseas holding countries of the United States, ranking fifth in total holdings.
Belgium's holdings increased by $19.8 billion month-over-month to about $490.5 billion, second only to Canada in increase and ranking fourth in total holdings.
It is worth noting that the market has also recently discussed whether third-location custody data fully reflects the identity of the final investors. The US Department of the Treasury's TIC data is mainly compiled based on reports from custodians and dealers. If foreign investors hold US securities through custodians in third countries, the related assets may be recorded under the name of the custody location rather than the country of the final owner.
Therefore, an increase in a single country's holdings does not necessarily fully correspond to actual purchases by that country's own investors. Especially when analyzing changes in US Treasury allocations by large holding countries such as China, the difference between the custody location and the final owner deserves attention.
Overseas Private Fund Inflows Dominate, Can US Treasury Demand Continue
Overall, major regions holding US Treasuries other than China and Japan showed varying degrees of increase in August.
Among the top ten overseas countries and regions holding US Treasuries, the Cayman Islands, ranked sixth in total holdings, slightly increased its bond holdings by $2.9 billion to $463 billion; Luxembourg, ranked seventh, increased its holdings by $6.1 billion to $448.2 billion; France, ranked eighth, increased its holdings by $15 billion, second only to Belgium in increase, to $363.4 billion; Ireland, ranked ninth, increased its holdings by $1.9 billion to $352.1 billion; and Taiwan, China, increased its holdings by $2.3 billion to $298.4 billion, ranking tenth.
The TIC report also shows that in August, overseas investors overall net purchased $300.7 billion in long-term US securities, of which private investors net purchased $257.8 billion and foreign official institutions net purchased $42.9 billion. If short-term securities, bank fund flows, and other items are further included, the United States recorded a net international capital inflow of $199.8 billion that month.
These data indicate that in August, overseas funds were still overall flowing into US financial markets, and demand for US Treasuries also recovered somewhat. However, the return of overseas funds and the reduction of holdings by major official holding countries are not contradictory: different investors may have different allocation strategies, and purchases by private investors can also offset some reductions by official institutions.
For the US Treasury market, what is worth watching going forward is, on the one hand, whether net purchases by overseas investors can continue, and on the other hand, whether Japan's forex intervention will continue to affect its US dollar asset allocation, and to what extent the decline in mainland China's official holdings reflects actual reductions.
The return of overseas funds provides support for US Treasury demand, but Japan and China continuing to reduce holdings also means that it cannot be concluded, based only on a single month's rebound in total holdings, that all major overseas holders' willingness to allocate to US Treasuries has improved simultaneously.
Comments