China, Japan, and Federal Reserve Reduce U.S. Treasury Holdings, Shifting Buyer Landscape

China, Japan, and the Fed are reducing US Treasury holdings, shifting the market and potentially impacting the US economy as the dollar's dominance faces challenges.

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China, Japan, and Federal Reserve Reduce U.S. Treasury Holdings, Shifting Buyer Landscape

China, Japan, and Federal Reserve Reduce U.S. Treasury Holdings, Shifting Buyer Landscape

China, Japan, and the Federal Reserve are significantly reducing their holdings in the $26 trillion U.S. Treasury market, leading to a shift in buyers and potential implications for the U.S. economy. This development is occurring just as inflation has reared its head and the strength of the dollar is forcing other central bankers to protect their currencies and reconsider their policy choices.

China has cut its holdings of U.S. Treasuries by about 25% since the beginning of 2021, dropping to $775 billion as of February 2023. Japan remains the largest holder with $1.168 trillion, while the United Kingdom has increased its holdings to $700.8 billion, closing the gap with China. Experts predict that if the trend continues, the UK will surpass China as the world's second-largest holder of U.S. Treasuries in the next few months.

The reduction in holdings is driven by the decreasing possibility of an early interest rate cut in the U.S. and growing conflicts between China and the U.S. While China is unlikely to completely abandon U.S. Treasuries, it is increasing its holdings of safe assets like gold instead of selling off U.S. Treasuries.

Why this matters: The declining interest of major foreign investors in U.S. Treasuries could lead to higher borrowing costs for the U.S. government and potentially impact the broader U.S. economy. The shift away from the U.S. dollar may affect America's ability to continue funding its budget and trade deficits, as foreign holders of U.S. Treasury bonds may seek to liquidate their holdings or not reinvest maturities or dollar-based income.

The U.S. dollar's dominance as the global reserve currency is facing significant challenges, with the current geopolitical developments posing the most serious challenge yet. The U.S. has used the dollar as a weapon to further its political objectives, which has made foreign institutions more reluctant to transact in U.S. dollars or hold dollar-based assets. Overseas investors, including China, have begun to move away from the dollar, favoring real assets and alternative trading arrangements.

The shifting dynamics in the U.S. Treasury market and the potential consequences for the United States have raised growing concerns among experts. Bank of Canada Governor Tiff Macklem has also commented on the federal government's fiscal path in Canada, highlighting the broader implications of these developments.

Key Takeaways

  • China, Japan, and UK reducing holdings in $26T US Treasury market
  • China cuts holdings by 25% since 2021, UK may surpass China soon
  • Declining foreign investment may raise US borrowing costs, impact economy
  • US dollar's dominance as global reserve currency facing challenges
  • Shifting dynamics raise concerns among experts on US fiscal path