The latest data released by the US Treasury Department shows significant divergence among the major global holders of US debt on the eve of the market turmoil in March 2025: Japan and the UK increased their holdings, while China sharply reduced theirs, leading to a major shift in rankings among overseas holders of US debt.
China Reduces Holdings, Falls to Third in US Debt Holding
According to the US Treasury's International Capital Flows Report (TIC) released on May 16, China reduced its US Treasury holdings by $18.9 billion in March, bringing its total holdings down to $765.4 billion. This was China's first net reduction in US debt since 2025. This move dropped China from the second to the third largest overseas holder of US debt, overtaken by the UK.
Despite US debt remaining a crucial part of China's foreign exchange reserves, this reduction appears to be linked to concerns at the time about US fiscal policy and rating risks. Market observers generally believe that China's move may be due to a strategic reassessment of rising US Treasury yields and the volatility of dollar assets.
UK Overtakes as Second, Japan Firmly First
In stark contrast to China, the UK increased its holdings of US debt in March, surpassing China to become the second-largest overseas holder of US debt. Meanwhile, Japan maintained its position as the largest holder, increasing its holdings by $4.9 billion, with a total amount reaching $1.1308 trillion.
Japan's continued allocation to US debt is seen as an extension of its monetary policy of maintaining flexibility and seeking stable returns, while the UK's increase is interpreted by some analysts as a strategic bet on long-term US assets.
Background: Increasing Volatility in US Debt Market Amid Rating Crisis
It should be noted that March coincided with the revival of the US debt ceiling debate, renewed expectations of an interest rate hike by the Federal Reserve, and market focus on sovereign credit rating risks. Moody's formally downgraded the US sovereign rating in May, confirming the prescient response of sensitive capital in the market that month.
Numerous international institutions might have already conducted preemptive adjustments to their US debt portfolios owing to considerations about US fiscal deficits, interest rate levels, and political uncertainty.
Global Debt Landscape Quietly Changing
Although US debt continues to be regarded as one of the world's "most liquid" assets, the shifts in capital flows in March 2025 reflect a potential turning point in the landscape of the sovereign debt market. China's actions might be only the beginning; whether more countries will also follow suit in reallocating their dollar assets remains to be closely watched by the market.
