Recent guidance from Chinese regulators has instructed major state-owned banks to limit and gradually reduce their holdings of US Treasury bonds, marking a strategic shift in China's long-standing reserve management. According to US Treasury data, China's holdings have fallen to approximately $680 billion as of late 2025, down significantly from a peak of over $1.3 trillion in the early 2010s. This decline represents a steady, years-long trend driven by reserve diversification and domestic financial risk management, rather than a sudden reaction to recent political tensions.
The regulatory guidance specifically targets commercial banks' balance sheets, not China's official state reserves. The move is attributed to increased volatility in US Treasuries compared to a decade ago, coupled with a weaker US dollar which amplifies losses when returns are converted to yuan. For banks focused on capital ratios and earnings stability, large foreign bond portfolios have become less attractive.
This pullback by China is being offset by continued and even increased demand from other global players. Japan now holds over $1.2 trillion in US Treasuries, with recent data showing rising holdings due to domestic constraints like low local yields and a need for liquid, scalable assets. Furthermore, reported increases in holdings by countries like the UK and Belgium often reflect custody shifts through global clearing systems rather than a fundamental change in economic ownership.
The most significant transformation is institutional. Private investors—including asset managers, hedge funds, and pension funds—have become the dominant marginal buyers, filling the gap left by official holders. Foreign ownership of US Treasuries reached a record above $9.4 trillion in late 2025. These price-sensitive investors focus on yield, liquidity, and relative value, making the market more responsive to sentiment than when it was anchored by long-horizon sovereign institutions.
The US dollar's recent decline sits at the center of these strategic calculations, affecting the local-currency returns for foreign holders and influencing hedging costs. This dynamic explains differing behaviors: European asset managers like Amundi have reduced dollar exposure, while Japanese investors, with long-standing hedging practices, continue to buy. The result is a Treasury market that remains well-funded due to its unmatched size and liquidity, but with ownership that is broader, deeper, and more sensitive to market conditions.
