In August, overseas funds returned to the U.S. Treasury market; UK holdings surpassed $1 trillion for the first time; Japan and China continued to reduce holdings, with China’s U.S. Treasury holdings hitting the lowest level since 2008

According to official U.S. data, overseas funds returned to the U.S. Treasury bond market in August of this year, but the allocation strategies of major foreign holders continued to diverge. Among the top three "creditors," Japan and mainland China continued to reduce their holdings, while the United Kingdom reached a new record high in its holdings.

On Friday, the U.S. Treasury Department released the Treasury International Capital (TIC) report, revealing that foreign investors made net purchases of $108.9 billion in U.S. Treasuries in August, reversing the net sale of $3.6 billion in July. In terms of holdings, foreign investors increased their holdings of U.S. Treasuries by $83.3 billion in August from the previous month, pushing the total to $9.3317 trillion, an increase after two consecutive months of decline.

Among the main foreign holders of U.S. Treasury bonds, the U.K.'s holdings surpassed $1 trillion for the first time in history, while Canada and Belgium also significantly increased their holdings. However, overseas funds' return to the U.S. Treasury market does not mean all major holding countries are increasing allocations. Japan's holdings have been declining since May, coinciding with its government’s intervention to sell U.S. dollar assets and buy yen. Mainland China has continued its long-term trend of reduction.

Japan Sets Record FX Intervention, Dollar Asset Allocation in Focus

The TIC data shows Japan’s holdings of U.S. Treasuries fell by $35.6 billion month-on-month in August to $1.0683 trillion, but Japan remains the largest overseas creditor to the U.S.

According to the TIC report, Japan's U.S. Treasury holdings have declined for four consecutive months. Holdings in June and July both hit new lows since January 2025, and August marked the lowest level since December 2024.

Amidst this continuous reduction in holdings, the Japanese government has intervened in the foreign exchange market multiple times this year to support the yen, raising market concerns over whether FX interventions are affecting Japan’s allocation of U.S. dollar assets.

Data released by Japan's Ministry of Finance on May 29 showed that between April 28 and May 27, the total amount of FX market intervention reached 11.73 trillion yen. Analysts believe the yen purchases and U.S. dollar sales may have involved a certain scale of U.S. Treasury bond sales.

Subsequently, Japan and the U.S. jointly intervened in the FX market in a rare move. On August 3, Japan's Ministry of Finance confirmed that the Japanese government and the U.S. Treasury coordinated FX intervention on July 31 to buy yen and curb the currency’s recent sharp volatility. This was the first time Japan and the U.S. had coordinated such an intervention since the 2011 Great East Japan Earthquake, and one of the few times outside of extraordinary events such as financial crises.

Data published later by Japan's Ministry of Finance indicated that between July 30 and August 26, the Japanese government spent about 15.4 trillion yen on FX market intervention, setting a new single-month record for intervention amount.

FX intervention usually requires selling foreign currency and buying yen. Because Japan's foreign reserves include large holdings of U.S. Treasury bonds, markets are watching to see if Japan will fund interventions by selling Treasuries and other dollar assets.

However, TIC data cannot directly prove how much, if any, of Japan’s U.S. Treasury reduction was used for FX intervention. Changes in holding balances are influenced not only by buy/sell activity, but also by valuation factors such as bond price changes, and therefore the $35.6 billion reduction in August cannot be entirely attributed to FX intervention.

China's Holdings Fall for Third Consecutive Month, Set 18-Year Low Twice in Two Months

According to the TIC report, mainland China's U.S. Treasury holdings fell by $27.3 billion month-on-month in August to $590.7 billion, marking the second consecutive month at the lowest level since August 2008, and continues to rank as the third largest foreign creditor to the U.S.

By August, mainland China's holdings had fallen for three straight months, and over the past 12 months, saw declines in ten of those months.

On a longer timeline, mainland China’s holdings have decreased significantly from past highs. In the years around 2016, China’s holdings once surpassed $1 trillion, but are now down to about $590 billion, illustrating an ongoing shrinking trend in official holdings.

Meanwhile, there has been speculation recently that China may hold some U.S. Treasuries via third countries. According to reports on Wednesday, some Wall Street investors and analysts suspect that China might be holding part of its U.S. bonds through financial institutions in places like Canada. This theory correlates with Canada’s increased holdings of U.S. Treasuries and related agency bonds in recent years.

However, there is no conclusive evidence for this claim. The rise in Canada’s holdings doesn’t directly prove they contain assets transferred from China, as it could result from other investors’ allocation changes.

Therefore, while TIC data confirms mainland China's continual reduction in holdings, public disclosures alone cannot confirm whether China's overall actual holdings of U.S. bonds are falling in parallel.

Canada Leads in Increased Holdings, Belgium Also Sees Significant Rise

Among the top ten foreign holders of U.S. Treasuries covered in the TIC report, only Japan and China reduced their holdings in August. The U.K., whose total holdings fall between those of China and Japan, increased its holdings for the second consecutive month.

The data show that the U.K.'s holdings increased by $11.2 billion month-on-month to $1.0095 trillion, surpassing $1 trillion for the first time ever, and setting record highs for a second straight month, maintaining its position as the second largest foreign holder according to the TIC report.

Canada and Belgium saw even more notable increases. Canada’s holdings grew by $38.3 billion month-on-month in August to about $464.6 billion, the largest increase among the top ten foreign holders, ranking fifth overall.

Belgium increased its holdings by $19.8 billion to about $490.5 billion, the second largest increase after Canada, and now ranks fourth in total holdings.

It is noteworthy that there is ongoing discussion about whether third-country custodianship data fully reflect the identities of end investors. The U.S. Treasury's TIC data is mainly compiled based on reports from custodians and dealers; if foreign investors hold U.S. securities via custodian institutions in third countries, the assets may be recorded under the custodian’s country rather than the ultimate owner’s country.

Therefore, increases in a single country’s holdings do not necessarily correspond entirely to purchases by its domestic investors. In analyzing shifts in U.S. bond allocations by large holders such as China, the differences between the custodian location and the ultimate owner are worth noting.

Private Overseas Capital Inflows Dominate—Will Demand for Treasuries Continue?

Overall, aside from China and Japan, major holders of U.S. Treasuries increased their allocations to varying degrees in August.

Of the top ten foreign holders of U.S. Treasuries, the Cayman Islands (ranked sixth overall) slightly increased holdings by $2.9 billion to $463 billion; Luxembourg (seventh) increased by $6.1 billion to $448.2 billion; France (eighth) increased by $15 billion—second only to Belgium’s increase—reaching $363.4 billion; Ireland (ninth) increased by $1.9 billion to $352.1 billion; and Taiwan region increased by $2.3 billion to $298.4 billion, ranking tenth.

The TIC report also shows that in August, foreign investors made net purchases of $300.7 billion in long-term U.S. securities, of which private investors bought $257.8 billion and foreign official institutions bought $42.9 billion. Including short-term securities and banking flows, the U.S. recorded a net international capital inflow of $199.8 billion for the month.

These data indicate that overall, foreign funds continued to flow into U.S. financial markets in August and demand for U.S. Treasuries recovered to some extent. However, overseas capital returning is not inconsistent with net official selling by major holders: different types of investors employ different allocation strategies, and purchases by private investors can offset some official sales.

For the U.S. Treasury market, the key questions moving forward are whether foreign net buying can continue, whether Japan’s FX interventions will further impact its allocation of U.S. dollar assets, and to what extent mainland China’s declining official holdings reflect actual divestment.

While returning overseas funds support the demand for U.S. Treasuries, continued reductions by Japan and China mean that a one-month increase in total foreign holdings does not imply a simultaneous improvement in the willingness of all major foreign holders to allocate to U.S. Treasuries.