U.S. government obligations, almost $50 billion, have been reduced by central banks.
Modern market watchers are keenly observing the shifting attitude of foreign investors, particularly institutional ones, towards the US government debt. Central banks appear to be losing interest in American treasury bonds. If this gap isn't filled by other investors, interest rates could skyrocket, further aggravating Washington's troubles.
In the last two months, Trump's chaotic trade policy has led to massive selling of American assets and the emergence of a trend known as "Selling America." Wall Street is still abuzz about another significant trend for 2025 – the weakening of the dollar.
"It's alarming that private foreign investors aren't very keen on buying Treasuries and may even exit the market," quotes Fortune Megan Swiber from Bank of America. Swiber and her team believe the demand from these investors has started to decline.
Foreign investors make up nearly a third (30%) of the long-term US bond market, according to Apollo's chief economist Torsten Slok. If foreign investors no longer view American treasury bonds as a safe haven to weather financial market storms, the US Department of the Treasury will have to pay more to attract buyers, effectively raising the yield on treasury bonds. This could increase pressure on mortgage rates, credit for small businesses, and other common borrowing options.
"The Treasury Department will have to finance more debt," explains Swiber. "We believe the deficit will continue to rise in the coming years and it will become harder to manage."
As of March, the amount of US debt held by foreign investors, according to the latest data from the US Department of the Treasury, reached record levels of $9.05 trillion and nearly 12% surpassed the previous year's figure. One might think everything is fine, but more recent data is likely to cause concern among American economists.
More than 200 central banks and other large financial institutions, like sovereign wealth funds from multiple countries, hold their treasury bills and other dollar-based assets at the Federal Reserve Bank of New York (NYFR). The size of these assets decreased by $17 billion during the past week. In total, the figure has fallen by $48 billion since the end of March. This decrease began after April 2, when Donald Trump announced tariffs on goods from 185 countries.
Usually, monetary authorities keep the money earned from selling American debt within the NYFR. However, this is no longer the case. Since the end of April, the amount of readily available funds within the bank has decreased by $15 billion. In other words, the amount of American assets that foreigners hold in the NYFR has shrunk by $63 billion over two months.
"This closely resembles a capital outflow from the Fed," explains Swiber.
She also points out the unusual nature of this process, considering the pronounced weakening of the dollar this year, which typically occurs during strong dollar periods.
Monetary authorities may certainly sell dollar-based assets and make prudent investments. Another explanation is that countries like Japan, India, or Turkey may be selling dollar-based assets and buying their own currency to prevent it from weakening further against the American dollar. However, these explanations do not apply in the current scenario since the DXY index, which measures the dollar's position against a basket of six major currencies, has fallen by 9% over the past 5.5 months of 2025. Therefore, the current mass sell-off of American assets has no connection to a race to protect their own currencies.
Likely, according to Swiber, central banks, and other monetary institutions are simply diversifying their portfolios and moving away from the dollar. As it turns out, this trend was partly driven by the turbulent events in global trade, which began shortly after Trump returned to the White House.
"The official sector has not been buying Treasuries in large volumes for over a year," says Swiber. At present, these organizations are not only selling but also reducing their holdings of American debt. If major institutional investors follow suit, it's unclear who will fill the resulting void.
This situation becomes even more complex with the fact that in the first quarter of 2025, demand for Treasuries was entirely provided by foreign investors and dealers. This means, according to Swiber, the US bond market is not expecting anything good in the future.
Insights:
Current Trends in the US Government Bond Market
- Rising Treasury Yields: US Treasury yields, particularly on ultra-long maturities like the 30-year bond, have risen significantly. For instance, the 30-year Treasury yield reached around 5% since early 2025, reflecting investor concerns about U.S. fiscal policy and global demand[3][2]. The 10-year and 2-year yields were 4.38% and 3.90%, respectively, as of June 2025[2].
- Volatile Market Environment: Investors are faced with volatility due to shifting tariff policies, debates over U.S. government debt, and broader economic uncertainty. Market experts expect this volatility to continue in the near term[1].
- Federal Reserve Policy Transition: The Fed is transitioning from a rate-hiking cycle to expected rate cuts later in 2025 to support a "soft landing" with declining inflation and gradual economic slowdown. However, inflation risks remain, which may alter Fed policy[5][4].
- Domestic Demand and Financial Sector Role: There is an expected increase in domestic demand for U.S. Treasuries, partly due to policy moves to ease banking regulations like the Supplementary Leverage Ratio. This could incentivize U.S. banks to buy more government bonds, alleviating some of the foreign selling pressure[3].
Potential Implications of Continued Foreign Investor Reductions
- Higher Treasury Yields and Borrowing Costs: If foreign institutional investors and central banks continue to reduce their U.S. government bond holdings, demand will weaken, putting upward pressure on yields. Higher yields boost U.S. government borrowing costs, potentially worsening the fiscal deficit outlook[3].
- Increased Market Volatility and Stress: Lessened foreign demand could amplify market volatility, especially if domestic investors do not sufficiently compensate for the demand gap. This might lead to more pronounced yield swings and uncertainty in fixed income markets[1].
- Weaker U.S. Dollar and Safe-Haven Status: A decline in foreign holdings can signal concerns over U.S. fiscal overspending and large budget deficits. This could erode investor confidence in the dollar’s safe-haven role, potentially leading to a weaker dollar[3].
- Shift in Investor Composition: Greater reliance on domestic buyers, including banks and institutional investors, could change the profile and behavior of the Treasury market. This may influence liquidity, price sensitivity, and the transmission of monetary policy[3].
Summary
If foreign institutional investors, including central banks, continue to trim their U.S. government bond holdings, the market may see:
- Higher Treasury yields and borrowing costs for the U.S. government
- Increased market volatility and uncertainty
- Potential weakening of the U.S. dollar and its global reserve currency status
- Greater dependence on domestic buyers, impacting market dynamics
- Broader economic consequences through tighter financial conditions
Ongoing fiscal policy developments, Federal Reserve actions, and global economic conditions will significantly influence how these trends evolve through 2025 and beyond[1][3][5].
"With foreign investors reducing their holdings of US Treasuries, private investors may find opportunities in the investing realm of US government bonds, as demand from foreign sources decreases," suggests Fortune Megan Swiber from Bank of America.
Given the current trends, the US Department of the Treasury might need to consider alternatives for attracting new investors in the future, in an attempt to maintain a balanced market and stable interest rates for US government borrowing.
