Are Foreign Investors Really “Dumping” US Treasury Bonds?

While much has been written about the recent “dumping” of US Treasury bonds (USTs) by foreign investors, a reduction of UST holdings by foreign investors has been under way for more than two decades. The rise in the Treasury term premium has temporarily interrupted Treasuries’ ability to serve as a risk-off hedge, but the outlook for Treasury duration risk is nuanced.

Key Points

• The recent “Sell America” sentiment has triggered broad-based market volatility, but the key question remains: Does this reflects a temporary sentiment shift, or a longer-term reallocation of global capital?
•  Despite rising concerns, US Treasuries remain the medium-term safe-haven, with limited near-term scope for foreign divestment.
• The tariff-driven sudden selloff appears technical, though amplified by fiscal worries, inflation pressures, and political uncertainties. These factors contributed to a higher term premium.
• While the term premium ebbs and flows, often influenced by tactical flows, a true structural “diversification but not divestment” reallocation flow out of US Treasuries would be a gradual, multi-year process.
• Our message to investors is that there is no need to panic on foreign “dumping” of Treasuries—many foreign holders are already underweight. Attractive carry and improving technicals could help restore long bonds’ safe-haven appeal.
• That said, if US fiscal issues remain unresolved, the term premium could widen further, posing a tail risk to the long end and weakening its role as a duration hedge (not our core scenario, but key tail risk to note).

Is This the End of US Exceptionalism?

For decades, investors have regarded the US as one of the most stable, accessible, and reliable destinations in which to invest and deploy capital, resulting in:

• US equity markets outgrowing all other broad asset classes since the GFC, and accelerating post-Covid, to now represent over 40% of the $115 trillion global stock market cap.¹
• US bond markets maintained a consistent growth trajectory over the period, now valued at $55 trillion, making up close to 40% of the more than $140 trillion global bond market.²
• US capital markets are the largest and deepest in the world, with the equity and bond markets at 3.9 times and 2.1 times the next-largest market (the EU), respectively.

Given the US dollar’s reserve status, US Treasuries have been treated as a global risk-free asset, allowing the US to finance its twin deficits with ease. However, both stock-bond and stock-dollar correlations picked up strongly through the 2022 Fed hiking cycle (Figure 1), making the hedging qualities of bonds and dollars versus equities less obvious. Add to that the emerging narrative regarding the demise of both US exceptionalism and the exorbitant privilege of the US dollar, a narrative that , accelerated after “Liberation Day”, market volatility was actually magnified by the sell-off of traditional “safe haven” assets like the US dollar and Treasuries, reminiscent of a classic emerging market (EM) crisis.

Foreign Divestments and EM Crisis-Like Selloffs May Sound Familiar

For decades, the thinking that there is no single alternative to US Treasuries for risk-free assets has been countered by foreign officials diversifying to other assets over time, reflecting shifts in economic and political power . This is not a new phenomenon, and has been evident since President Nixon’s 1971 abandonment of the Gold Standard, which de-facto unpegged the US dollar from gold prices. The fierce selling pressure on traditional safe haven assets like long-dated US Treasuries and the US dollar in the weeks following President Trump’s tariff shock was reminiscent of the selling in the Gilt and Sterling markets post former UK Prime Minister Liz Truss’s “mini budget” of 2022. So, the post-Liberation Day Sell America experience is not entirely new for investors. There have been previous instances, albeit relatively few in the past four decades (Figure 2).

The Rise in the Term Premium Is No Reason to Panic

For the US Treasury market, increased fiscal concern on top of structural inflationary and political uncertainty has led to a higher term premium (Figure 3), as additional compensation is being demanded from investors for taking on duration risk. Given the higher term premium, the equity risk premium has fallen, contributing to a rise in stock/bond correlation and a reduction in hedging efficacy.

The question then is whether this feedback loop might continue, magnified by the “dumping” of US Treasury bonds by foreign holders. We do not believe so, for the following reasons:

The Post-Liberation Market Disruption in US Treasuries Was Likely Temporary.

Contrary to various press reports, we believe the sudden rise in the term premium post Liberation Day was driven mainly by tactical (including fast money-type) investment flows, rather than a structural flow reallocation (see: Making Sense of the Current US Treasury Market). A structural reallocation would need to be executed carefully to avoid such market disruption, and as a result, would take years to fully play out.

Foreign US Treasury Holdings Actually Peaked in the 2000s.

During this period, the outstanding stock of Treasury debt increased, while the absolute amount of overseas holdings only rose modestly. Declining ownership trends from overseas (30%), along with lower Fed ownership due to quantitative tightening (15%), imply that domestic private investors, including commercial banks (55%), have picked up the slack to become the marginal buyer of Treasury debt (Figure 4).

In addition, one could argue that overseas investors, including Officials, are already Underweight US Treasuries. Data suggest that US government bonds account for 30% of world foreign exchange reserves,³ versus a US weight of 40% ⁴ in the outstanding global bond market.

Foreign Holdings of US Assets Are Concentrated in US Equities, Rather than Treasuries.

By dissecting the mix of foreign US dollar assets, it is clear that the bigger chunk of holdings are concentrated in US equities at close to $17 trillion (Figure 5). While we cannot rule out some degree of foreign capital outflows from risky assets in the event of a severe US recession or an intensified Sell America narrative, we think it's likely that the outflow will come from equities first with corporate bonds next, and unlikely to start with Treasuries.

While we do not have a clear view on how European structural equities holders (the likes of sovereign wealth funds and pension plans with large equity allocations) would act, it is fair to assume any change in strategic asset allocation would be longer term in nature. The recent changes to Germany’s fiscal position, and the concurrent strength in the Euro might accelerate any gradual rebalancing process, but any shift in strategic asset allocation is complex and multidimensional.

The Japanese and Chinese Unwinding Narrative Is Based on Incorrect Assumptions.

The nations with the largest holdings of Treasury securities – Japan and China – are often blamed as the culprits of recent volatility in the US Treasury market. However, Chinese ownership of US Treasury holdings has been on a declining trend for the past decade. This is a known fact, and is due to China’s desire to re-dollarize or reduce reliance on the dollar. Meanwhile, in the case of Japan, their large holdings of US Treasuries are structural in nature, given the US-Japan strategic alliance partnership encompassing military, economic, and defense cooperation (Figure 6). This is in line with the recent rhetoric of Finance Minister Katsunobu Kato, who suggested that Japan’s stockpile of US Treasuries could be a card to play in trade talks with Washington (although he walked this back immediately).⁵

Looking Ahead: Attractive Carry Is a Potential Tailwind for Duration

Confidence in US assets, including equities, fixed income, and the US dollar, has been shaken. However, we do not see convincing evidence in either flow data or price action to suggest any “dumping” or significant shift in foreign ownership patterns in recent weeks, which by itself would warrant an even higher risk premium in long-dated Treasuries.

Furthermore, we see no meaningful shift in the safe-haven status of US Treasuries over the medium term, despite heightened concerns around credit quality following the recent Moody’s downgrade. The US Treasury market remains unmatched in terms of depth and liquidity, and the US dollar continues to dominate global finance—serving as the primary currency for commodities pricing, international trade, and official FX reserves. This structural advantage is further reinforced by the yield premium Treasuries offer relative to most advanced economies. While countries like Australia, New Zealand, and the UK offer comparable yields, their markets are far too small to absorb large-scale reallocations without triggering significant market dislocations.

That said, we believe the long end of the US Treasury curve will remain under pressure from persistent concerns about large and unsustainable budget deficits. While some of these concerns have already been priced in—enhancing the carry appeal of US Treasuries for long-term investors—there remains a risk that markets could demand materially higher yields at longer maturities if fiscal imbalances remain hopelessly unaddressed. This is not our base case, but it represents a key tail risk for the long end of the curve.

Finally, investors should not underestimate the potential tools that the US government (or US Treasury Department) could deploy to influence asset prices, independent of the Fed. These include Supplementary Leverage Ratio revisions (see: Making Sense of the Current US Treasury Market); Treasury “buybacks” or “operational twists;” ⁶ or proposed bills to make Treasury securities tax-exempt for domestic holders. Of course, the flipside of such active suppression of Treasury yields is further gradual weakening of the dollar (see: Long-Term US Dollar Risks Persist).

We believe we have seen cyclical and tactical moves in US Treasury holdings in recent weeks. We take the threat of US fiscal irresponsibility seriously, but we expect longer term structural forces (including foreign demand) to reassert themselves in the near term, albeit against a structural backdrop of potentially fading US asset dominance.