Foreign holdings of US Treasuries fell in June, led by declines from Japan, the UK and China, according to Treasury Department data, and ING says the heavy tone across the Treasury market has further to run, citing the lapse of the 60-day US-Iran truce without resolution, continued issuance pressure from all directions and a structural reset in real yields toward pre-financial-crisis norms.

Foreign holders trim across the board

Total foreign holdings slipped to $9.299 trillion in June from $9.371 trillion in May, though they remained up 2.3% from a year earlier. Foreign investors collectively rank among the biggest holders of US debt, alongside the Federal Reserve and domestic funds, which is why the monthly figures are watched closely as a gauge of overseas appetite for funding persistent US borrowing needs.

Japan stayed the largest non-US holder of Treasuries despite a 2.3% decline to $1.116 trillion, still well short of its November 2021 peak of $1.325 trillion. The UK, the second-largest holder and widely viewed as a proxy for hedge fund positioning given its role as a global custody hub, saw holdings fall 1% to $939.9 billion. China's holdings dropped 4% to $633.4 billion, the lowest level since September 2008 and down more than 13% year on year, though China remains the third-largest non-US holder overall. June also extends a longer arc: China's Treasury holdings peaked above $1.3 trillion in 2013, leaving the current level roughly half that high-water mark.

A messy transaction picture

On a transaction basis, June recorded Treasury inflows of just $6.8 billion, down sharply from $56.6 billion in May, while overall net capital inflows into the US held steady at $133.5 billion, roughly in line with May's $131.5 billion, supported by $181.4 billion into equities and $35.6 billion into corporate bonds.

ING's own read of the same period, drawing on Treasury International Capital (TIC) system data, shows a considerably larger $72 billion net liquidation of Treasuries by foreign holders in June, with Japan, China and some custodial centres among the net sellers, while Canada, Belgium and Switzerland were net buyers. Country attribution in the TIC data comes with caveats: positions booked in custodial centres such as Belgium, home to the Euroclear clearing hub, can reflect securities held on behalf of investors based elsewhere.

The bank notes the data series has become volatile and measure-dependent from month to month: net foreign selling of $56 billion over the past three months sits against net buying of $205 billion over the past 12 months, while total US inflows including equities remain strong at $173 billion for June. Whether June proves an outlier or the start of a trend will only become clear in coming months' releases.

Iran truce lapse removes a circuit-breaker

Foreign appetite for Treasuries cooled in June and ING does not see the pressure easing soon, pointing to real yields normalising, Iran risk reasserting itself and issuance from all directions still building.

On the broader market tone, ING points to the lapsing of the 60-day US-Iran truce without resolution as a meaningful shift. Prior moves above 4.65% on the 10-year had typically been met with reassuring signals from the Trump administration pointing to an imminent resolution with Iran. That reassurance has been notably absent this time, which ING says adds modest but ongoing upside pressure to energy prices at the margin.

Combined with continued issuance pressure — Treasury supply elevated amid persistent federal budget deficits and hyperscaler-related credit issuance layered on top — ING sees scope for yields to stay under pressure, even as it stresses that credit spreads remain relatively contained.

Real yields: normalisation, not dislocation

ING's more important point, it argues, is structural rather than the headline holdings number. The bank attributes much of the recent rise in real yields less to issuance alone and more to a broader normalisation, arguing current levels represent a reversion toward the kind of real yields seen before the financial crisis and the pandemic years suppressed them artificially. Before 2008, 10-year real yields routinely traded well above the levels that became normal in the post-crisis era of quantitative easing, when central bank bond-buying and subdued growth kept them pinned near historic lows. On ING's reading, real yields resetting toward pre-financial-crisis norms is not necessarily a warning sign.

The pressure is visible at the long end of the curve. The yield on the US 30-year has risen to its highest level since the middle of 2007, at around 5.321%. Earlier, the US Treasury sold 30-year bonds at a high yield of 5.216%.

Eurozone liquidity tightening, gradually

ING also flags tightening liquidity conditions building in the eurozone banking system as the ECB's bond portfolios continue to run off. Excess reserves have fallen by around €300 billion this year to €2.16 trillion, feeding into funding spreads, with the overnight ESTR now trading at its widest level versus the ECB deposit rate since the first half of 2021. Further out the curve, 6-month and 1-year Euribor-OIS spreads remain broadly in line with year-to-date averages.

Banks' use of the ECB's weekly liquidity operation stands at €16.5 billion, down from a local peak near €22 billion in early August but not materially above typical 2026 allocations, leaving overall conditions still ample for now.

A late-July ECB bank treasurer survey found lenders intend to hold reserve buffers well above minimum requirements while still generally preferring market funding over ECB facilities, which carry some stigma. ING points to eventual tension as someone will need to move first to tap ECB operations, a shift the bank tentatively expects around early 2027. ING also notes the ECB's shrinking bond holdings support longer-run structural cheapening views for Bunds — a dynamic relevant to Bund spread positioning over the medium term — with liquidity conditions tightening gradually rather than abruptly.

Source: Investinglive