China Went From $1.3T to $693B in US Bonds as Moody’s Downgraded America

Key Takeaways

• China’s US Treasury holdings fell to $693B, an 18-year low, after being cut nearly in half from a $1.3T peak in 2013
• Moody’s stripped America of its last AAA rating on May 16, the same week China hit an 18-year low, and Japan dumped bonds at the fastest pace in 4 years
• The 30Y yield hit 5.1% directly because of the buyer retreat, pushing mortgages near 7% and passing the bill to every American who borrows

China has been reducing its exposure to US national debt for years. But this time, the timing caught markets off guard. Just days after Moody’s downgraded the US credit rating, Treasury data showed China’s treasury holdings had fallen to $693 billion. This is their lowest level since the 2008 financial crisis. Back in 2013, China held more than $1.3 trillion in US Treasuries. Now, that number has been cut nearly in half. Meanwhile, the 30-year treasury yield moved above 5.1%. This has added more pressure to borrowing costs across the US economy.

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US National Debt Pressure Is Rising as China Cuts Treasury Holdings

The decline in China’s treasury holdings did not happen overnight. Beijing has slowly reduced its Treasury exposure over the past decade as trade tensions, reserve diversification, and broader de-dollarization discussions picked up.

But the latest drop came during a rough week for the US bond market. Moody’s downgraded the US on May 16. They cited concerns around rising deficits and the growing US national debt. Around the same time, Japanese investors were also reducing bond holdings at the fastest pace in four years.

When foreign demand weakens, the US usually has to offer higher yields to attract buyers. This pressure is now showing up in long-term borrowing costs. The 30-year treasury yield briefly crossed 5.1% this week. Meanwhile, the average mortgage rates remained close to 7%.

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Foreign Buyers Are Pulling Back Slowly

China’s Treasury holdings are now back near levels last seen during the global financial crisis, according to Treasury International Capital (TIC) data from the US Treasury Department.

Some analysts believe the shift says more about diversification than panic selling. Former Goldman Sachs Asset Management chairman Jim O’Neill said,

“The US bond market is very large. If China or Japan reduces its holdings, someone else will buy them.”

Foreign ownership of Treasuries still remains high. This is despite China cutting exposure. But investors are paying closer attention because higher yields eventually filter through the economy. Mortgage rates, auto loans, and credit card borrowing costs have all stayed elevated this year.

De-Dollarization Concerns Are Back in Focus

The latest Treasury data also revived conversations around de-dollarization. But it does not mean the dollar is losing its global role overnight. The US bond market remains the largest and most liquid in the world. But the steady decline in China’s treasury holdings shows how global buyers are becoming more selective at a time when US borrowing continues rising.

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