Allies aren't buying either! Pro-US countries' purchases of US Treasuries plunge 60% in the first eight months; Japan plummets 99%, South Korea posts record net selling.

Title context: Allies aren't buying either! Pro-US countries' purchases of US Treasuries plunge 60% in the first eight months; Japan plummets 99%, South Korea posts record net selling. Text: Now, even Washington's closest partners are no longer reliably footing the bill for America's deficits. Based on calculations from US Treasury Department and State Department data, in the first eight months of 2026, countries and regions closely aligned with the US position net purchased US medium- and long-term Treasuries (excluding short-term Treasury bills) totaling US$174.3 billion, a new low for the same period since 2021 and a year-on-year decline of more than 60%. This shift is particularly striking in Asiaeconomies that have long maintained large surpluses are reducing the allocation of surplus funds to US Treasuries. Japan, the largest overseas holder of US Treasuries, net purchased only US$389 million in the first eight months of this year, a year-on-year plunge of 99%; South Korea posted net selling of US$23.8 billion, the largest reduction for the same period since records began in 1977; China's Taiwan province was also in a state of net selling. There is no single cause for this shift in capital flows. Governments rarely state an intention to actively withdraw from US Treasuries, and the statistical methodology cannot distinguish between official bond purchases and private investment behavior within a country. Multiple factors are fermenting together: weakening local currencies, rising domestic yields, improved appeal of equity assets, and concerns over US policy uncertainty. Masahiko Loo, senior fixed income strategist at State Street Investment Management (with over US$6 trillion in assets under management), said: "The US Treasury market hasn't lost overseas buyers; it has lost buyers who automatically allocate passively. US policy is becoming increasingly unpredictable, making it difficult to sustain the logic of large-scale structural overweight in US Treasuries and the habitual recycling of surplus funds into US Treasuries." US government debt has climbed to more than US$40 trillion, making the world's largest economy more dependent on investors to fund its spending. Meanwhile, Trump's tariff policies and US policy uncertainty have raised concerns about the long-term outlook for the dollar. And from Japan to Europe, market yields are rising everywhere, giving global investors more alternatives to US Treasuries than ever before. It is understood that the traditional model for Asia's high-savings economies was to convert trade surpluses into dollars and then allocate them to US Treasuries. This year, however, currency depreciation has eroded their purchasing power, forcing countries to draw on foreign exchange reserves to stabilize their currencies. The yen at one point fell to a four-decade low, and data shows that Japanese authorities sold some US Treasuries and other securities this summer to prop up the yen. The Korean won at one point fell to its lowest level since 2009 before recovering somewhat. Officials have not clearly disclosed their thinking. In May this year, a senior official at Japan's Ministry of Finance said that selling US Treasuries to support the yen would be counterproductive and that the authorities were aware of the risks involved in reducing holdings; the Bank of Korea said in September that it planned to broaden the investment scope of a portion of its foreign exchange reserves managed by domestic asset managers, no longer confining it to US Treasuries. Methodology note The determination of "position alignment" may be subjective. This analysis (an update to a version first published in February) uses State Department data to classify countries into most aligned, least aligned and neutral categories based on the frequency with which their votes on key UN resolutions match those of the US. This approach is commonly used in academia to identify allies and adversaries. For example, long-time military ally Australia is classified as most aligned, while Mexico, a neighbor of the US, falls into the neutral category. The statistical scope is net purchases (purchases minus sales) of US Treasuries with original maturities of more than one year, covering 57 countries and regions and including both official and private investors. Treasury data may attribute securities held through custodians or intermediaries to the country where the custodian is located rather than the country of the ultimate owner. As a result, holdings and purchases attributed to financial centers such as the UK and Belgium may partly reflect investors elsewhere. More asset choices Even as Asian capital flows overseas, US Treasuries are not necessarily the default first choice. Brad Setser, senior fellow at the Council on Foreign Relations and former Treasury official, noted that South Korean capital prefers equities, while capital from China's Taiwan region has shifted toward equity assets and deposits. "So some of the major surplus countries are no longer large net buyers of US Treasuries." Setser sees this phenomenon as part of a broader trend of dereservification: more and more overseas assets are no longer held in central banks' traditional foreign exchange reserve accounts but are held by pension funds, state-owned banks and other large institutions. This is not equivalent to de-dollarization, but it will bring a decline in official demand for US Treasuries. Strategist Andre de Silva said: "Dollar funding costs continue to rise, eroding US Treasury returns; at the same time, Japanese government bond yields are rising, improving opportunities in domestic assets." Rising yields elsewhere are also offering investors new choices. Yang Joo Kyung, head of global fixed income at Korea's Kiwoom Asset Management, said the company remains cautious on US Treasuries and considers Japanese government bonds relatively attractive. Japanese investors also have more reasons to keep their money at home. With domestic yields at multi-decade highs, the extra return they can earn by investing overseas has narrowed. "Japan is a US ally, and we do see some signs that the carry trade is gradually unwinding," said Oliver Levingston, G-10 FX and rates strategist at BofA Securities. The carry trade involves borrowing yen at low cost and investing in higher-yielding overseas assets. But that does not mean the US cannot find buyers. Private investors, including hedge funds, banks and mutual funds, have stepped in, raising their share of federal debt to about 70%, close to the highest level since 1990. But they are more price-sensitive. For Treasury Secretary Scott Bessent and Fed Chair Kevin Warsh, that means the market could react sharply if investors are unsettled by monetary policy, economic conditions, the widening US deficit or signals from the White House. It is precisely this high sensitivity that drove the benchmark 10-year US Treasury yield above 5% at one point this year; as of Wednesday Asian trading hours, the yield held near 5.01%. Least aligned countries In JanuaryAugust, countries most at odds with Washington's position net purchased a combined US$17.1 billion of US Treasuries, ending four consecutive years of net selling in the same period, but the scale was only one-tenth of purchases by the pro-US camp. China remained the top reducer, with a reduction larger than South Korea's. Belgium (whose holdings are believed to include some Chinese accounts) ranked third in reductions; the UK, Hong Kong and India were the main increasers. "China's continued reduction is consistent with a long-term diversification trend," said Laura Cooper, head of macro credit at Nuveen in London. In fact, this is not the first time US allies have retreated from the US Treasury market. When the COVID-19 pandemic triggered a global scramble for liquidity in 2020, these countries also sold US Treasuries on a large scale. Nevertheless, the US$32 trillion US Treasury market remains irreplaceable in terms of depth, liquidity and near round-the-clock trading, and the dollar retains its status as the world's dominant reserve currency. As of August, foreign investors still held US$7.85 trillion of US Treasuries, close to a record high, but their market share has shrunk from a peak of 52% in 2012 to less than one-third. "Globally, there are very limited assets that can substitute for US Treasuries," said Robert Tipp, head of global bonds at PGIM. "So some countries continue to rebalance and reduce holdings, but there is always other money to take up the slack." Overseas capital is not abandoning US assets either: some funds have shifted into US equities and US corporate bonds, indicating investors remain interested in US companies, but their willingness to allocate to US Treasuries has cooled. And the new buyers filling the gap will most likely demand higher risk compensation, no longer like America's allies in the past, who financed US fiscal needs steadily and regardless of cost. Shoki Omori, chief Japan fixed income strategist at Deutsche Bank, concluded: "The US can always complete its debt financing; the variable is the financing rate, and the volatility of rates. What the price level itself cannot buy back is the patient, price-insensitive long-term capital that allies once provided."