Insights 
VT 
Foreign ownership of U.S. Treasuries reached an unprecedented $9.16 trillion in July, marking a three-month increase. This rise was largely driven by increased purchases from Japan and the UK.
Japan’s holdings increased to $1.15 trillion, while the UK neared $900 billion in holdings. Meanwhile, China’s holdings decreased to $731 billion, the lowest since 2008.
China’s Shift From The Dollar
China is diversifying away from the dollar to bolster the yuan. The U.S. Treasury Department provided this data.
We are seeing the July data confirm a major split in the Treasury market, with record foreign buying being offset by China’s significant selling. This tug-of-war between strong demand from allies and strategic selling from a major holder will likely lead to choppy price action in bonds. As a result, we expect Treasury yields to remain highly sensitive to incoming economic data over the next few weeks.
With the next Federal Reserve meeting scheduled for late September, this dynamic in the bond market creates uncertainty around interest rate policy. Current fed funds futures are pricing in about a 40% probability of one more rate hike by the end of 2025, a jump from just 25% last month. This makes options based on the SOFR rate a key tool for traders to position for, or hedge against, the Fed’s next move.
China’s Currency Strategy
China’s selling appears directly aimed at supporting its currency, as the offshore yuan has been hovering near a multi-year low of 7.38 against the dollar. This is a pattern we also observed back in 2023 when similar Treasury sales coincided with efforts to slow the yuan’s decline. Traders should watch for this selling to continue, possibly using call options on the USD/CNH pair to speculate on the pressure persisting.
On the other side, Japan’s strong buying is fueled by the attractive yield differential between U.S. Treasuries and its own government bonds, which remains over 3.5%. This steady flow of capital out of Japan has historically weakened the yen, pushing the USD/JPY exchange rate higher. We expect this trend to provide continued support for long dollar-yen positions via futures or options.
These conflicting international flows are increasing underlying market tension, even if surface volatility seems calm. The VIX index, a key measure of expected stock market volatility, has already ticked up to 22 from its summer lows below 18. This suggests we should consider purchasing protection, such as VIX calls or put options on major indices, to guard against a sudden market disruption.
