Foreign investors’ holdings of U.S. Treasury securities fell by $50.4 billion in July from June, settling at $9.25 trillion, according to U.S. Treasury Department data. Meanwhile, the Bank of England announced a six-month halt to government bond sales and an end to long-term bond sales as part of a plan to reduce most of its remaining portfolio by 2034.
Holdings decline amid debt-market pressures
Foreign holdings data reflect buying and selling activity as well as changes in asset valuations. The decline came as the Bloomberg U.S. Treasury Bond Index fell by more than 1% in July, amid concerns about inflation risks exacerbated by the war with Iran, as well as continued worries about the U.S. fiscal deficit.
Japan and China cut holdings
Japan, the largest foreign holder of U.S. Treasury securities, reduced its holdings by $12.8 billion in July to $1.1 trillion. The move coincided with Japanese authorities’ intervention to support the yen, while more recent data from Japan’s Finance Ministry indicated that Tokyo may have sold some of its foreign securities holdings to finance its interventions in the foreign-exchange market.
U.S. Treasury Secretary Scott Bessent said one reason the United States may have joined the intervention to buy yen on July 31 was to reduce Japan’s need to sell U.S. assets to finance its currency-market interventions.
China, the third-largest foreign holder of U.S. Treasury securities, reduced its holdings by $15.4 billion to $618 billion. Belgium’s holdings also declined to $470.7 billion; analysts say these may include custodial accounts linked to China.
By contrast, the United Kingdom, the second-largest foreign holder, increased its holdings by $58.4 billion to $998.3 billion. France’s holdings fell by $41.5 billion to $348.4 billion, while Canada’s declined by $33.3 billion to $426.3 billion.
Bank of England suspends auctions until April
The Bank of England revised its plan days after 30-year British borrowing costs reached their highest level since 1998, amid a broad sell-off in global bond markets. Governor Andrew Bailey said the bank would retain a large portion of the government bond portfolio it bought for monetary-policy purposes, while gradually disposing of the remainder over the next eight years.
Bailey denied that the plan’s revision was a response to deteriorating market conditions, saying the bank had begun reshaping its bond-sale program before the U.S.-Iran war broke out in February. Prices of long-term British government bonds rose after the decision and their yields fell, pushing the 30-year yield to a three-week low.
The Bank of England bought £895 billion of sterling-denominated bonds, about $1.20 trillion, mostly government bonds, between 2009 and 2021 under quantitative-easing programs aimed at supporting the economy and lowering long-term borrowing costs.
The bank began selling the bonds in September 2022 under its quantitative-tightening policy, before reducing the pace of portfolio reduction to £70 billion, about $94 billion, a year last year.
Breakdown of the British bond portfolio
Under the new plan, the Bank of England will permanently retain bonds worth £120 billion, about $161 billion, maturing in 2049 or later to support banknote issuance. It will also hold to maturity bonds worth £222 billion, about $297 billion, maturing by 2034.
The bank will sell the remaining bonds, worth £146 billion, about $195 billion, maturing between 2035 and 2049, at a rate equivalent to about £20 billion, about $27 billion, a year.
The Bank of England will suspend all bond-sale auctions until next April while it consults with the government on the possibility of selling the bonds directly to the Debt Management Office at market prices instead of holding its own auctions.
The Bank of England estimates that quantitative tightening has raised government bond yields by about a quarter of a percentage point, while some analysts believe its impact on 30-year bond yields could approach three-quarters of a percentage point.
