Japan's holdings of US Treasury bonds fell to $1.1431 trillion in May, a decrease of $66.8 billion in a single month and a drop of approximately $96.2 billion from the February peak, marking one of the most significant recent contractions in overseas official holdings. China's holdings rebounded slightly to $659.3 billion, but remain near historical lows, indicating that both China and Japan, the two traditional official buyers, are not allocating as much US Treasury bonds as before.
However, this cannot be simply interpreted as "foreign funds are completely abandoning US Treasury bonds." The total amount of foreign holdings of US Treasury bonds still increased slightly in May, and foreign investors were still net buyers of long-term US Treasury bonds that month. The real change lies in the demand structure: private funds are still buying US assets, while official sectors, especially reserve-type buyers like Japan, are experiencing a phased reduction in holdings.
For the market, the pressure is not in the monthly sell-off itself, but in the instability of marginal buying. When the US fiscal deficit and Treasury bond supply remain high, if low-cost official buyers like Japan and China continue to reduce their allocations, US Treasury bonds will need higher yields to attract pension funds, mutual funds, banks, and private overseas funds to take over. This will push up the term premium, putting upward pressure on long-term US Treasury yields in the medium term.
