China and Japan Unload Massive U.S. Treasury Holdings Amid Economic and Political Shifts
Two of the largest foreign holders of U.S. government debt, China and Japan, significantly reduced their Treasury holdings in the third quarter of the year. As global markets prepared for the U.S. presidential election, Japanese and Chinese investors sold a combined total of over $113 billion in U.S. securities.
This move reflects growing concerns about political uncertainty and economic policy shifts under the incoming administration.
According to the U.S. Department of the Treasury, Japanese investors sold a record $61.9 billion worth of Treasuries in the three months ending September 30. Meanwhile, Chinese funds offloaded $51.3 billion, marking the second-largest reduction on record for the country.
The selloff occurred as the return on U.S. Treasuries reached a 2.5-year high in mid-September, buoyed by market anticipation of political change. However, after the Republican Party secured control of the White House and both houses of Congress, the value of Treasuries dropped nearly 4%.
Investors became wary that the low-tax, high-tariff policies of President-elect Donald Trump could drive inflation higher, eroding the appeal of fixed-income securities like Treasuries.
Japan’s decision to shed Treasuries was partly influenced by domestic factors. In July, Japan’s Ministry of Finance intervened in the foreign exchange market, selling U.S. dollars to purchase ¥5.53 trillion yen ($35.9 billion) in an effort to stabilize the yen. This intervention amplified the need for Japanese investors to adjust their portfolios.
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Shoki Omori, Chief Japan Desk Strategist at Mizuho Securities Co., highlighted the dual pressures faced by Japanese investors:
“It’s a cocktail of banks and pension funds selling ahead of the U.S. elections. The risk of a Trump win and expectations of higher U.S. yields bruised sentiment for the bonds.”
For China, the selloff was driven not only by market dynamics but also by geopolitical concerns. Tensions between Beijing and Washington, exacerbated by trade disputes and territorial disagreements, led to increased caution. Omori noted, “Geopolitical risk was a real concern in China, spurring investors to ditch Treasuries.”
Adding complexity to China’s selloff is its use of custodial accounts. Funds in Belgium, which often serve as a conduit for Chinese investments, purchased a record $20.2 billion in Treasuries in September. This suggests that while China was selling directly, it may have been quietly reallocating some investments through alternative channels.
Despite these record selloffs, Japan and China remain two of the largest foreign holders of U.S. debt, with $1.02 trillion and $731 billion in holdings, respectively. This underscores their continued influence over the U.S. Treasury market. However, their actions reflect a growing trend of diversification and risk management in response to global economic uncertainty.
Nick Twidale, Chief Analyst at AT Global Markets, highlighted the strategic nature of these moves:
“They’ve been good defensive measures by China and Japan, and that’s probably going to continue. With Trump’s likely inflationary policies and tariffs, more Treasury sales are expected from both countries.”
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Compounding these challenges is the uncertainty surrounding Trump’s economic policies and his eventual pick for U.S. Treasury Secretary. Expectations of higher inflation, fueled by potential tax cuts and protectionist trade policies, have driven yields higher and further dampened the appeal of Treasuries.
Meanwhile, the Federal Reserve’s shift away from aggressive interest-rate cuts, driven by signs of economic resilience, is adding to upward pressure on yields. For major foreign holders like China and Japan, these dynamics make Treasuries less attractive, pushing them to recalibrate their portfolios.
The massive selloff of U.S. Treasuries by Japan and China in the third quarter reflects a convergence of political, economic, and geopolitical factors. As global markets brace for the impact of the new U.S. administration’s policies, the moves by these two major players signal caution and strategic positioning.
With both nations still holding substantial amounts of U.S. debt, their future actions will remain pivotal to the Treasury market. However, the recent selloff underscores a growing sentiment among global investors: navigating the uncertainties of U.S. economic and political policy requires adaptability and foresight.