In the report on international capital flows (TIC) published by the US Treasury on April 17, a very interesting phenomenon occurred in the position of US Treasuries. According to statistics, in February this year, Japan once again refreshed its highest level since August 2022 with an open interest of $1.1679 trillion, adding $16.4 billion. This growth has made Japan the largest overseas holder of U.S. bonds among the top 10 "U.S. overseas creditors."
At the same time, China's holdings of U.S. Treasury bonds have fallen frequently, by $22.7 billion, and for two consecutive months, the total holdings have been close to their lowest level since 2009. Despite this, China remains the second-largest overseas holder of U.S. bonds, but its holdings have been below $1 trillion since April 2022.
On the other hand, Japan's holdings have been growing steadily since June 2019, when it overtook China as the largest holder of U.S. bonds. For the whole of 2023, Japan saw a decline in holdings only in February, May and September, with a net increase of $63.1 billion in holdings for the year. In 2023, China's holdings decreased by $50.8 billion, with only March, November and December showing an increase in holdings throughout the year, and the rest of the months showed a trend of reducing holdings.
Moreover, among the top 10 U.S. bond holders listed in the TIC report, Switzerland became the country with the largest reduction in February with a decline of $26.5 billion, followed by China in second place to reduce holdings. Japan and France, with $16.4 billion and $15.4 billion respectively, became the two countries with the largest holdings of U.S. debt.
From these data, we can see the attitude of various countries towards U.S. bonds, and Japan's continued increase in holdings can be called a "die-hard fan" of U.S. bonds.
As we all know, U.S. Treasury bonds, as an important asset of the world's reserve currency, have always been sought after by investors. However, in recent years, with the global economic downturn, the pressure has increased, and the problems of inflation and fiscal deficit in the United States have not been resolved, and the investment attractiveness of U.S. bonds has also declined, and the tide of reducing holdings has begun to rise.
Although the Fed has been raising interest rates at an accelerated pace during this period, it wants to curb inflation. But the immediate consequence of raising interest rates is that US Treasury yields have risen, and real yields on US Treasury holdings have fallen. For investors looking for stable income, U.S. Treasuries have become less attractive.
This, coupled with global geopolitical tensions, has also raised concerns among investors about the safety of U.S. bonds. In the past two years, the global market has been full of uncertainties due to geopolitical events such as the Russia-Ukraine conflict and the Palestinian-Israeli conflict. In the midst of risk aversion, investors are more inclined to allocate their funds to gold, a traditional safe-haven asset, so interest in U.S. Treasuries is also waning. This is one of the reasons why gold has been rallying lately.
Moreover, since the outbreak of the Russia-Ukraine conflict, the United States and the European Union have begun to freeze Russia's overseas assets, and have threatened to aid these assets to Ukraine in the form of "compensation", it is obvious that this move has sent a very dangerous signal to the world: overseas assets, especially the US Treasury bonds held, may be "forcibly wiped out" at any time. As a result, people are speculating that if one day, China is also sanctioned by the United States and Europe for some reason, then the huge US debt will definitely become a bargaining chip for the United States to sanction China.
Therefore, since 2022, China has continued to reduce its holdings of US bonds. This is not only to reduce financial risks, but also to take the initiative in the foreseeable game in the future. It is worth mentioning here that after the Sino-US summit in November last year, China slightly increased its holdings of US bonds, perhaps in anticipation of a thaw in Sino-US relations. However, in December and January and February this year, China resumed the trend of reducing its holdings, and it can be seen that the relationship between the two countries is still an important consideration affecting the increase or decrease of US debt.
If U.S. bonds have lost their attractiveness, why do Japan and the United Kingdom continue to "increase their holdings against the trend"?
To put it simply, Japan, Britain and the United States have a long-standing alliance. For Japan, the United States is the most important security guarantee. After the end of World War II, Japan grew rapidly under the auspices of the United States and became the world's third-largest economy (just overtaken by Germany in February). Therefore, Japan is very much needed to a certain extent and depends on the support of the United States.
The same is true for the United Kingdom, which has struggled in recent years to strengthen its ability to become independent, but its relationship with the United States remains inextricably linked. Especially given the post-Brexit international environment, US support is even more important for the UK. In this case, both countries need to make up for the shortcomings of their domestic economies by investing overseas to generate revenues. As an important asset, U.S. bonds have become an important investment choice for both countries.