China Trims US Treasury Holdings: What's Behind the Selloff?

The U.S. Treasury's latest international capital flows report (TIC) shows that total foreign holdings of U.S. Treasuries fell from $9.49 trillion in February to $9.35 trillion in March. Among them, China's holdings dropped from $693.3 billion to $652.3 billion over the same period.

This broad-based reduction was not unique to China. Major economies including Japan, Canada, and South Korea also reduced their positions in March.

According to interviews conducted by China Business News, the decline reflects both a short-term common factor — heightened risk aversion triggered by the U.S.-Israel-Iran conflict — and a medium-to-long-term structural trend of diversifying global foreign exchange reserves.

Geopolitical conflict was the most immediate trigger. Ding Zhijie, Director of the Financial Research Institute at the People's Bank of China, told China Business News that the sudden surge in panic sentiment and the shock to energy prices sharply tightened financial market liquidity. Some investors proactively reduced their long-duration U.S. Treasury exposure to cut portfolio risk.

Federal Reserve custodial data shows that foreign official and international accounts held at the New York Fed saw cumulative Treasury holdings fall by nearly $82 billion over approximately five weeks between late February and the end of March.

Meanwhile, declining Treasury prices also caused passive valuation erosion. The surge in oil prices driven by the conflict intensified inflation expectations and weakened market bets on Fed rate cuts. The 10-year U.S. Treasury yield rose sharply by about 38 basis points to 4.32% in March, while the Bloomberg U.S. Treasury Total Return Index fell approximately 1.7% that month — the largest monthly decline since October 2024.

Ding explained that TIC data is marked to market. When rising yields push bond prices lower, nominal holdings of all countries will passively decline even without any actual buy or sell activity.

Beyond market dynamics, individual countries' domestic funding needs also accelerated the selldown. Gulf oil producers such as Saudi Arabia and the UAE reduced their holdings to cover fiscal shortfalls caused by the disruption to oil exports through the Strait of Hormuz. Countries like India and Turkey, whose currencies were under pressure, may have sold Treasuries and other reserve assets to intervene in foreign exchange markets.

From an asset allocation perspective, the shifting interest rate environment increased the commercial incentive to adjust positions. Since 2025, the Fed has maintained restrictive rates far longer than the market anticipated, keeping sustained pressure on long-duration Treasury prices.

Ding noted that for sovereign investors whose primary considerations are safety and liquidity of foreign reserves, moderately shortening duration and increasing allocations to short-term Treasury bills or money market instruments is a rational risk management decision.

It is worth noting that Middle East tensions eased somewhat in April. Foreign official and international accounts held at the New York Fed showed signs of stabilization and recovery in April after the phased decline in late March. High-frequency Fed custodial data shows a notable rebound in foreign official U.S. Treasury holdings in April, suggesting the March reduction was a temporary market fluctuation that should not be over-interpreted.

“Overall, the phased decline in China’s U.S. Treasury holdings in March was the result of multiple short-term factors and is consistent with the direction of change seen among major economies — it is not a China-specific phenomenon,” Ding concluded.