China No Longer Largest Holder of U.S. Debt, while Many Other Governments Keep Reducing Their UST Holdings Too

It looks like foreign governments have been purposefully reducing their UST holdings over time. China is no longer the largest foreign holder of U.S. debt as its portfolio has fallen below $1 trillion for the first time since 2010. China had $980.8 billion in U.S. debt in TIC securities in May 2022, down $23 billion from the previous month and nearly $100 billion less than a year ago, according to Treasury Department figures released on Monday. China has been cutting its treasury holdings for six consecutive months.

Japan, which reduced its U.S. debt to $1.212 trillion in May from $1.218 trillion in April, is now the largest foreign holder. Total foreign investment in US debt fell to $7.42 trillion in May from $7.45 trillion in April.

A Treasury index is based on the recent auctions of U.S. Treasury bills and skewed towards the U.S. Treasury's daily yield curve. There are several treasury indices, but the most commonly used index is derived from the yields of 5- and 10-year Treasury notes and futures contracts.

Importantly, the U.S. Treasury index rates impact other types of securities and are an important indicator of how much risk investors are willing to take on. Components of a treasury index are likely to be the weighted average prices of five-year, 10-year, and bond-futures contracts.

Back to the news, Beijing is seeking to diversify its debt obligations as the Federal Reserve's interest rate hike cycle, which began earlier this year, pushed down U.S. bond prices.

The reduction of U.S. debt holdings by many countries and institutional investors worldwide is also a reflection of the global "de-dollarization" process. According to ZeroHedge statistics, global U.S. debt reserves have continued to decline over the past two years. At the same time, the global reserves for gold are climbing.

Several factors are pushing foreign investors to sell U.S. debt. On the one hand, the Fed is in the midst of an aggressive rate hike, driven by inflation, and is expected to raise rates by at least 75 basis points again next week. Higher U.S. bond yields mean lower bond prices, which can be costly for investors who don't plan to hold to maturity. And Wall Street as a whole expects the same robust increase at the upcoming July FOMC meeting. At the same time, China is building up a yuan-denominated foreign exchange reserve to compete with the dollar and support other economies facing instability.