Japan's holdings of U.S. Treasury bonds decreased in November, while the UK's holdings are close to that of mainland China, with total foreign net inflows nearing $160 billion

On January 17th, Eastern Time, the U.S. Department of the Treasury released the International Capital Flow Report (TIC), showing that Japan, the largest "creditor" of the United States, slightly reduced its holdings of U.S. Treasury bonds in November, while China increased its holdings that month.

Japan's holdings of U.S. Treasury bonds decreased by $3.1 billion to $1.0988 trillion in November. After a brief rebound in August, Japan's U.S. Treasury bond holdings have declined again in the following months. Since surpassing China in June 2019, Japan has remained the largest overseas holder of U.S. Treasury bonds.

The Wall Street Journal previously mentioned that changes in Japan's U.S. Treasury bond holdings this year were once seen as adjustments under pressure to intervene in the foreign exchange market. To stabilize the yen exchange rate, Japan needs to have sufficient "ammunition," which necessitates reducing dollar assets, including U.S. Treasury bonds, to raise funds. For example, some media cited data indicating that Japan invested $36.6 billion to intervene in the foreign exchange market in July.

However, in August and September, the yen rebounded strongly against the dollar, and the Japanese government temporarily had no need to support the yen, losing a major motivation to sell U.S. Treasury bonds. Since October, the yen has shown signs of weakness again. Last week, the yen to dollar exchange rate hit a six-month low, approaching the critical threshold of 160, but this week it rebounded due to rising expectations of a rate hike by the Bank of Japan in January.

Mainland China increased its holdings of U.S. Treasury bonds by $8.5 billion to $768.6 billion in November. Since April 2022, China's holdings of U.S. Treasury bonds have remained below $1 trillion, making it the second-largest holder of U.S. Treasury bonds after Japan as of last November. In the first eleven months of last year, holdings decreased for eight months, with increases only in April, June, and the latest in November.

Analysts generally believe that, given the changes in Sino-U.S. relations and the trend of diversifying foreign exchange reserve asset allocation, China's holdings of U.S. Treasury bonds may continue to decline steadily. Future fluctuations in China's holdings will largely be influenced by Sino-U.S. relations.

In recent years, China's reduction in U.S. Treasury bond holdings has been more about the need for diversified asset allocation of foreign exchange reserves, with an increased allocation to gold being a reflection of this diversification. As of last April, the People's Bank of China had recorded a historic 18 consecutive months of increasing gold holdings, after which it temporarily paused, but recently resumed gold purchases. Data released earlier this month showed that China's gold reserves were 73.29 million ounces at the end of December, up from 72.96 million ounces at the end of November, marking the second consecutive month of increased gold holdings by the People's Bank of China.

Among the top ten holders of U.S. Treasury bonds listed in the TIC report, most other holders increased their holdings in November compared to October. Among them, the UK increased its U.S. Treasury bond holdings by $22.3 billion to $765.6 billion, bringing the UK's holdings close to those of mainland China, with only a $3 billion gap as of the end of November. The Cayman Islands' holdings of U.S. Treasury bonds decreased by $12.7 billion to $397 billion in November.

From the performance of major assets in November, the Dow Jones Industrial Average rose by 7.5%, and the S&P 500 index increased by 5.7%, both achieving the best monthly performance of 2024. The yield on the 10-year U.S. Treasury bond fell by more than 11 basis points in November, while the yield on the 2-year U.S. Treasury bond decreased by more than 2 basis points for the month.

TIC data also shows:

• In November, the total net inflow of foreign capital, including long-term securities, U.S. short-term securities, and bank funding flows, amounted to $159.9 billion. Among them, the net inflow of private foreign capital was $156.6 billion, and the net inflow of official foreign capital was $3.3 billion.
• In November, foreign residents increased their holdings of U.S. long-term securities, with a net purchase scale of $115.7 billion. The net purchase by foreign private investors was $124 billion, while foreign official institutions net sold $8.3 billion.
• U.S. residents increased their holdings of long-term foreign securities in November, with a net purchase scale of $36.7 billion.
• After adjustments, such as estimating foreign investment portfolios acquiring U.S. stocks through stock swaps, the estimated total net purchase of long-term securities by foreigners in November was $79 billion.
• Foreign residents increased their holdings of U.S. Treasury bonds by $11.3 billion. The total amount of short-term U.S. securities and other custodial liabilities held by foreign residents increased by $20.6 billion.
• Banks' net liabilities to foreign residents in U.S. dollars increased by $60.3 billion.

The U.S. Treasury Department's TIC data for December of last year is scheduled to be released on February 18, 2025