Foreign holdings of US Treasuries rise in May despite China drop

Foreign holdings of U.S. Treasuries surged past $9 trillion in May, a third consecutive month above this threshold, as foreign buyers, excluding China, returned to the market following April's tariff-induced outflows. Foreigners acquired $146 billion in Treasuries, the largest monthly inflow since August 2022, while China continued to reduce its holdings to a 15-year low of $756.3 billion to bolster its yuan. Concurrently, foreign investors poured $114.3 billion into U.S. equities, contributing to a robust total net capital inflow of $311.1 billion into the U.S., signaling renewed global confidence in U.S. assets after a volatile April.

Analysis

Foreign demand for U.S. assets demonstrated significant resilience in May, with net capital inflows rebounding to $311.1 billion after a tariff-driven outflow of $14.6 billion in April. The core of this recovery was a $146 billion purchase of U.S. Treasuries, the largest monthly inflow since August 2022, bringing total foreign holdings to $9.045 trillion, just shy of the March record. This renewed appetite, reflected in the "risk-on" market tone, was also evident in U.S. equities, which saw a dramatic reversal from an $18.8 billion outflow to a $114.3 billion inflow. A key divergence persists with China, which continued its strategic divestment by cutting its Treasury holdings for a fourth consecutive month to $756.3 billion, a 15-year low, primarily to support its currency amid domestic economic pressures. In contrast, other major holders increased their positions, with Japan hitting a record $1.135 trillion and the UK, often a proxy for institutional investors and hedge funds, reaching an all-time high of $809.4 billion. The strong buying from the UK and Canada's swift return as a net buyer after being targeted by tariffs underscore that private global capital remains confident in U.S. assets, viewing the April disruption as temporary.

Key Decisions for Investors

• The robust rebound in foreign capital inflows into both U.S. equities and Treasuries provides fundamental support for the U.S. dollar, suggesting global investors are looking past short-term trade policy volatility.
• Investors should monitor the shifting composition of foreign Treasury ownership, as declining central bank demand from China is being offset by private and institutional flows, which could make the bond market more sensitive to changes in risk sentiment.
• The continued, systematic selling of U.S. debt by China remains a key macro risk to monitor, as an acceleration could signal deeper economic challenges in China or escalating geopolitical tensions, potentially impacting global bond market stability.
• The massive $114.3 billion foreign inflow into U.S. equities signals renewed international conviction in U.S. corporate performance and may act as a technical tailwind for the market.