In March, foreign holdings of U.S. Treasuries fell to $9.25 trillion from $9.49 trillion in February, with China reducing its holdings to $652.3 billion, the lowest since September 2008, and Japan shedding approximately $47 billion to $1.191 trillion.
This selloff was driven by the need for central banks to liquidate dollar reserves to defend local currencies against a severe energy shock caused by rising crude oil prices amid the U.S.-Iran conflict. Frederic Neumann, chief Asia economist at HSBC, noted that the increased financial volatility and pressure on exchange rates, particularly in Asia, led to this decline in Treasury holdings.
The data for April is anticipated to reveal further actions by central banks in response to currency stabilization needs. The selloff also resulted in a $142.1 billion valuation loss for foreign investors in long-term Treasury holdings in March. Interestingly, the U.K. increased its Treasury holdings by approximately $29.6 billion during this period.
Analysts suggest that while China has been reducing its direct Treasury exposure, its overall presence in U.S. debt markets may be underreported due to 'shadow holdings' through custodial centers like Belgium and Luxembourg.
The situation is particularly critical for Japan, which has faced a depreciating yen and rising oil import costs, prompting speculation about whether it will continue to liquidate Treasuries to support its currency. U.S. policymakers have indicated a preference for Japan to explore alternative strategies rather than selling Treasuries