As the Federal Reserve raises interest rates more and more aggressively, overseas investors continue to sell U.S. debt! On July 18, local time, the U.S. Treasury Department released its monthly international capital flow report (TIC), which showed that in May this year, the size of U.S. Treasury bonds held by overseas investors increased year-on-year.

It fell by US$33.7 billion to US$7.42 trillion, the lowest since June last year.

The two largest overseas "creditors" continue to reduce their holdings of U.S. debt.

In May, Japan sold U.S. Treasury bonds for the third consecutive month, with its U.S. bond holdings decreasing by $5.7 billion month-on-month, and its total holdings hitting a new low since the beginning of 2020; China’s U.S. bond holdings experienced a “sixth consecutive decline”. As of May, the holdings fell

It broke the trillion-dollar mark for the first time since May 2010.

Since the beginning of this year, the Federal Reserve has raised interest rates three times, and a fourth rate increase is imminent.

Experts say that the weakening appeal of U.S. debt is closely related to the Fed's tightening process. At the same time, the diversification of foreign exchange reserve assets of central banks around the world is also a general trend.

The two largest overseas holders of U.S. debt continue to reduce their holdings, and European buyers buck the trend and buy. As the Fed raises interest rates one after another, smart overseas investors begin to reduce their holdings of U.S. debt.

Data from the May International Capital Flow Report (TIC) show that as of May this year, overseas investors sold U.S. debt for the third consecutive month, with their holdings falling to the lowest since June last year.

Among the top two overseas "creditors", Japan's holdings of U.S. Treasury bonds fell to $1.2128 trillion in May, a decrease of $5.7 billion from the previous month.

Judging from published data, Japan has reduced its holdings of U.S. debt for three consecutive months, and its total holdings continue to hit a new low since the beginning of 2020.

China sold U.S. Treasuries for the sixth consecutive month.

In May, China's holdings of U.S. debt fell by $22.6 billion month-on-month, making it the largest reduction among major U.S. debt-holding economies.

As of May, China's U.S. bond holdings fell to $980.8 billion, falling below the trillion-dollar mark for the first time since May 2010.

European buyers bucked the trend and bought.

TIC data shows that after experiencing a sharp reduction in holdings in April, European buyers began to increase their holdings of U.S. debt.

Among them, the United Kingdom increased its holdings of U.S. debt by $21.3 billion in May, ranking as the third largest overseas holder of U.S. debt.

Switzerland increased its holdings of U.S. debt by $22.5 billion in May, and its position jumped to fourth place from the previous seventh place.

Data show that foreign official institutions sold US$34.1 billion in U.S. debt in May, while overseas individual investors bought US$133.9 billion in U.S. debt, setting a single-month record.

The Federal Reserve has been criticized for raising interest rates. Reducing U.S. debt holdings will help reduce the spillover from the Federal Reserve's policy. In the face of a once-in-40-year inflation, the Federal Reserve is raising interest rates aggressively.

Data released recently showed that the U.S. CPI rose by 1.3% month-on-month in June and 9.1% year-on-year, much higher than market expectations.

Against this background, the Federal Reserve’s 75 basis point interest rate hike this month is already the “lower limit” of market expectations.

The Fed's tightening has also become the "trigger" for overseas investors to sell U.S. debt.

Experts said that the reduction of U.S. debt holdings by the Federal Reserve's two major "creditors" may be closely related to the Federal Reserve's continued interest rate hikes, and the market is worried that the Federal Reserve may raise interest rates more aggressively.

Zhou Maohua, a macro researcher at the Financial Market Department of China Everbright Bank, analyzed that many countries are currently selling U.S. debt, mainly because the United States is currently in the middle of raising interest rates and has just begun to shrink its balance sheet, and the market is worried about the pressure to adjust U.S. debt.

"Generally speaking, countries reducing their holdings of U.S. debt and reducing their dependence on the U.S. dollar will help reduce the spillover effects of the Federal Reserve's policies and enhance the independence of each country's monetary policy." Zhou Maohua said.

Previously, Tsuyoshi Ueno, senior economist at Japan's NLI Research Institute, said: "Investors continue to be wary of U.S. inflation and the accompanying aggressive pace of interest rate hikes, as well as the rise in U.S. Treasury yields." He predicted that this trend of U.S. debt selling may

This will continue until there is a clearer view of where U.S. interest rate hikes will peak.

Asset diversification is the general trend. RMB assets have attracted much attention. Inflation is soaring and interest rates are rising fiercely. The considerations for capital allocation have changed in response to the times.

"In recent years, the diversification of economies and trade of various countries and the diversification of foreign exchange reserve assets of central banks are major trends." Zhou Maohua said.

The recently released "Invesco Global Sovereign Asset Management Research" stated that currently, soaring inflation has prompted sovereign fund investors to re-examine their asset allocation, mainly turning to increasing private market allocation.

At the same time, although the U.S. dollar remains the main global reserve currency, the proportion of U.S. dollar reserves held by major central banks has been steadily declining over the years, and global central banks' allocations to the RMB have continued to rise.

Data from the International Monetary Fund (IMF) shows that over the past 20 years, the U.S. dollar's share of global foreign exchange reserves has shown an overall downward trend. In the first quarter of this year, it accounted for 58.88%, which was significantly lower than the share of more than 70% around 2000.

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"Investors are increasingly interested in allocating Chinese assets." Invesco Research's survey results show that central banks in all economies are aware that the RMB's proportion in global foreign exchange reserves will continue to increase.