Foreign ownership of U.S. Treasuries hit a record $9.16 trillion in July, marking a rise over three months. This jump was mainly due to increased purchases from Japan and the UK. Japan’s holdings reached $1.15 trillion, while the UK neared $900 billion. In contrast, China’s holdings dropped to $731 billion, the lowest level since 2008.

China’s Shift From The Dollar

China is moving away from the dollar to strengthen the yuan. The U.S. Treasury Department provided this information. The July data shows a clear divide in the Treasury market. Record foreign buying is countered by China’s major selling. This back-and-forth between strong demand from allies and strategic selling by a major player will likely lead to price fluctuations in bonds. Consequently, we expect Treasury yields to respond sharply to new economic data in the coming weeks. With the next Federal Reserve meeting set for late September, this bond market dynamic creates uncertainty around interest rate policy. Current fed funds futures indicate about a 40% chance of one more rate hike by the end of 2025, up from 25% last month. This makes options based on the SOFR rate an essential tool for traders looking to position for, or protect against, the Fed’s next move.

China’s Currency Strategy

China’s selling seems aimed at supporting its currency, as the offshore yuan has been close to a multi-year low of 7.38 against the dollar. We noticed a similar pattern in 2023 when Treasury sales corresponded with efforts to stabilize the yuan. Traders should keep an eye on this selling trend, possibly using call options on the USD/CNH pair to speculate on its continuation. Meanwhile, Japan’s aggressive buying is driven by the attractive yield difference between U.S. Treasuries and its own bonds, which exceeds 3.5%. This steady capital outflow from Japan has historically weakened the yen, pushing the USD/JPY exchange rate higher. We expect this trend to keep supporting long dollar-yen positions via futures or options. These conflicting international flows are creating tension in the market, even if it seems calm on the surface. The VIX index, a key gauge of expected stock market volatility, has already risen to 22 from summer lows below 18. This increase suggests it may be wise to purchase protection, such as VIX calls or put options on major indices, to guard against sudden market disruptions. Create your live VT Markets account and start trading now.

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