Treasuries, China reduces exposure but the market holds steady: fears of a broader global pullback

The recent call by Chinese authorities for domestic banks to limit purchases of U.S. Treasuries caused only a brief jolt in bond markets. The price decline, which on Monday pushed the yield on the 30-year U.S. bond up by five basis points, was quickly absorbed. The very next day, yields were falling again, as investors focused on macroeconomic data and the Federal Reserve’s upcoming moves.

Yet the issue remains sensitive. China, once the largest foreign creditor of the United States, has halved its Treasury reserves since 2013. This gradual reduction is consistent with a strategy of diversifying reserves and reducing exposure to the dollar, developed in light of growing geopolitical tensions with Washington.

Despite this, the U.S. debt market continues to show signs of resilience: contained volatility, narrow bid-ask spreads, and well-covered auctions. Foreign holdings reached a record $9.4 trillion in November. However, their share of total debt has fallen to 31%, down from 50% in 2015, reflecting the sharp expansion of federal borrowing.

The central issue is not so much China, but rather the potential imitation effect. Some European funds have recently reduced their exposure to Treasuries, while emerging countries such as India and Brazil have trimmed their positions to support their currencies and diversify reserves. If long-standing allies such as Europe and Japan were to accelerate their pullback, the market’s balance could be put to the test.

Many analysts, however, urge caution. As long as the United States maintains a wide trade deficit, the dollars accumulated abroad will need to be reinvested, and Treasuries remain among the most liquid and safest assets in the world. Moreover, according to some estimates, China’s actual exposure may be higher than official data suggest, due to holdings channeled through European intermediaries.

Andrea Pelucchi