On May 19, the U.S. Treasury Department released its latest International Capital Flows (TIC) report, showing that total foreign holdings of U.S. Treasury bonds decreased from $9.49 trillion in February to $9.35 trillion. Specifically, holdings by mainland Chinese investors declined in March, falling from $693.3 billion in February to $652.3 billion.
From an overall market perspective, the reduction in U.S. Treasury holdings in March was not unique to China; major economies such as Japan, Canada, and South Korea also reduced their holdings.
According to interviews conducted by First Financial Daily, this phenomenon stems from both the common short-term factor of market risk aversion triggered by the U.S.-Israel-Iran conflict and the medium- to long-term structural trend of global foreign exchange reserve diversification. It is both a natural reaction of the U.S. Treasury market itself under the impact of Middle East geopolitical conflicts and energy supply shocks, and a normal result of global investors proactively adjusting their U.S. Treasury investments amidst financial market turmoil and declining dollar liquidity.
Geopolitical conflicts were the most direct trigger for the decline in U.S. Treasury holdings by many countries in March. “The conflict between the US, Israel, and Iran triggered severe turmoil in financial markets, driving investors to reduce their holdings of US Treasury bonds due to liquidity needs,” Ding Zhijie, director of the Financial Research Institute of the People’s Bank of China, told Yicai. He explained that the surge in panic and the impact of energy price shocks led to a sharp tightening of liquidity in financial markets. Some investors, driven by the “cash is king” hedging strategy, proactively reduced their holdings of longer-term US Treasury bonds to lower their portfolio risk exposure.
Data from the Federal Reserve’s custody system shows that from February 25 to the end of March, foreign official and international accounts’ custody holdings of US Treasury bonds at the Federal Reserve Bank of New York decreased by nearly $82 billion in approximately five weeks.
Meanwhile, the decline in US Treasury bond prices also passively reduced the market value of US Treasury bond holdings. The war and the blockade of the Taiwan Strait in March pushed up international oil prices, raising inflation expectations and weakening market bets on a Federal Reserve rate cut this year. In March, the 10-year US Treasury yield rose sharply by about 38 basis points to 4.32%, while the Bloomberg US Treasury Total Return Index fell by about 1.7% that month, the largest drop since October 2024.
Ding Zhijie explained that TIC US Treasury data is measured by market capitalization. When rising yields lead to falling bond prices, even without any buying or selling by investors, the nominal holdings of various countries will passively decrease due to the decline in US Treasury prices.
In addition, countries’ own funding needs also accelerate the reduction of their US Treasury holdings. “Some official investors are reducing their holdings of US Treasury bonds to raise liquidity and alleviate fiscal and exchange rate pressures,” Ding Zhijie analyzed. The obstruction of the Strait of Hormuz has disrupted the oil export channels of Gulf oil-producing countries, leading to a sharp decline in oil revenue and a surge in fiscal pressure. For example, Saudi Arabia and the UAE reduced their holdings that month, using the proceeds from US Treasury bonds to make up for fiscal funding gaps. Meanwhile, the currencies of countries like India and Turkey are under pressure, and their central banks may sell US Treasury bonds and other reserve assets for exchange rate intervention.
From an investment allocation perspective, changes in the interest rate environment increase the commercial motivation for investors in various countries to adjust their holdings. Since 2025, the Federal Reserve has maintained its restrictive interest rate level for a much longer period than the market expected, putting continuous pressure on the prices of long-duration US Treasury bonds.
Ding Zhijie believes that for sovereign investors who prioritize the safety and liquidity of their foreign exchange reserves, appropriately shortening the duration and increasing the allocation ratio of short-term Treasury bills or money market instruments is a commercially sound risk management behavior.
It is worth noting that with the easing of tensions in the Middle East in April, foreign official and international accounts’ holdings of US Treasury bonds in custody at the Federal Reserve Bank of New York, after a temporary decline in late March, showed signs of stabilization and rebound in April. High-frequency custody data from the Federal Reserve shows a significant rebound in foreign official investors’ holdings of US Treasury bonds in April, indicating that the reduction in holdings in March was a temporary market fluctuation and should not be over-interpreted.
“Overall, the temporary decline in my country’s holdings of US Treasury bonds in March was the result of multiple short-term factors, consistent with the trend of holding changes in major economies, and not unique to China,” Ding Zhijie said.
