China Continues to Cut U.S. Treasury Holdings in May, Reaching a Nearly Four-Year Low
According to the latest Treasury International Capital report (TIC) released by the U.S. Department of the Treasury on July 17, China again reduced its holdings of U.S. Treasury bonds by $900 million in May 2025, bringing its total holdings down to $756.3 billion. This marks a three-month consecutive decline, continuing the overall reduction trend since 2022, further solidifying China's position as the third-largest foreign holder of U.S. debt.
Since April 2022, China's holdings of U.S. Treasury bonds have consistently been below $1 trillion, with reductions of $50.8 billion and $57.3 billion in 2023 and 2024, respectively. In early 2025, China briefly increased its holdings, but has sold off bonds for three consecutive months starting March, reducing its holdings by a total of $28 billion.
This trend reflects China's strategic adjustment in international asset allocation, likely influenced by changes in the global financial environment, Sino-U.S. economic frictions, and considerations of policy diversification.
Japan and the UK Take Opposite Approach, Increasing U.S. Treasury Holdings to Remain in Top Two Positions
In stark contrast to China, both Japan and the United Kingdom opted to increase their U.S. Treasury holdings in May. Japan, as the largest foreign holder of U.S. debt, increased its holdings by $500 million, bringing its total to $1,135 billion, holding firmly to the top creditor position. The UK also increased its holdings by $1.7 billion, raising its total to $809.4 billion, maintaining its second place ranking.
Although the amounts weren't large, in the current context of rising global concerns about the sustainability of U.S. debt, the attitudes of Japan and the UK have been interpreted by the market as a "stabilization signal," especially under the Federal Reserve's policy of maintaining high interest rates, which increases their relative attractiveness.
Investors generally believe that Japan and the UK, for reasons of currency policy hedging, safety allocation, or strategic alliances with the U.S., will likely continue their high level of participation in U.S. treasuries in the short term.
Overall Foreign Capital Inflows Rise, Private Investments Active
The report also shows that in May 2025, the total net inflow of all foreign funds into U.S. long-term and short-term securities, as well as bank cash assets, reached $311.1 billion, a significant increase from April. Of this, private foreign funds contributed a net inflow of $333.2 billion, reflecting the market's temporary preference for U.S. assets.
Official funds, however, showed a net outflow, totaling $22.1 billion. This discrepancy highlights the differing attitudes of various types of institutions toward the U.S. fiscal and monetary outlook: private capital focuses more on short-term returns and volatility opportunities, while sovereign entities and central banks exhibit a more cautious approach in their portfolio adjustments.
Complex Net Buying Structure, Significant Adjustments in Long-term Securities Trading
In the sphere of long-term securities, foreign investors net purchased $318.5 billion, a rebound from the net sale of $50.6 billion in April. Private investors drove most of the purchases, accounting for over ninety percent, with official agencies also participating, albeit on a modest scale.
However, after accounting for stock swaps and securities rebalancing, foreign investors overall net sold $259.4 billion in U.S. long-term securities in May, indicating that some inflows may not be based on "long-term bullish" sentiment, but rather due to structural trading arrangements.
This contrast reminds the market that while the U.S. Treasury market remains well-funded, investor confidence is still influenced by numerous variables including geopolitical, inflationary, and fiscal risks.
Structural Divergence in U.S. Treasuries Intensifies, Investors Move Towards Rational Allocation
Analyzing various data, while short-term liquidity remains strong in the U.S. Treasury market, major foreign debt holders are exhibiting strategic divergence. China's continued reduction may reflect deep considerations regarding U.S. Treasury returns, exchange rate risk, and political factors; meanwhile, Japan and the UK's steady increases could be closely related to their national policy spaces and foreign reserve management mechanisms.
With the Federal Reserve's high interest rate policy persisting and unresolved fiscal deficit expansion, the supply and demand structure of U.S. treasuries may further diverge in the coming months, with the inclinations of foreign funds becoming one of the key indicators to observe. For global investors, a more prudent and flexible asset allocation strategy may become the main theme for coping with market fluctuations in the next phase.
