Emerging Markets Are Quietly Dumping U.S. Treasuries

For decades, U.S. Treasuries have been a key component of foreign reserve portfolios in emerging markets (EMs). This accumulation wasn’t just about earning returns, it was a strategic decision based on three main reasons:

• Reserve Safety and Liquidity: U.S. Treasuries are seen as the safest and most easily tradable securities in the world, backed by the full credit of the U.S. government. Central banks in countries like China, India, Brazil, and Russia built up massive reserves of Treasuries to protect their currencies, maintain economic stability, and manage capital outflows during volatile periods.

  
  

• Dollar-Based Trade System: Since most global trade, especially in commodities, is invoiced in U.S. dollars (USD), holding Treasuries allowed emerging markets to reinvest their trade surpluses into USD assets. This helped them manage exchange rate volatilities and stay firmly connected to the dollar-driven trade system.

  
  

• Financial and Political Alignment: Accumulating Treasuries was also a way for EM countries to show alignment with the financial system led by the United States. It signaled a commitment to the rules of the Washington Consensus and offered indirect leverage by deepening financial ties with the United States.

Between 2000 and 2024, foreign official holdings of U.S. Treasuries surged from under $1 trillion to nearly $8 trillion, reflecting not just confidence in the U.S. dollar but a global consensus around its role in international trade and finance.

Export-driven economies like China, Japan, South Korea, and Taiwan consistently ran current account surpluses, largely from trade with the United States and Europe. To prevent their currencies from appreciating (which would hurt exports), they reinvested these surpluses into dollar-denominated assets, with U.S. Treasuries being the top choice.

Treasuries offered unmatched liquidity, massive secondary markets, and near-zero credit default risk, thereby making them ideal reserve assets for both emerging and advanced economies alike.

Japan and China have consistently remained either the largest or second-largest holder of U.S. Treasuries, often swapping their positions depending on exchange rate targets and their monetary policies. China, after joining the WTO in 2001 and experiencing an export boom, built up more than $1.3 trillion in Treasuries by the mid-2010s.

At various points, Japan and China together have accounted for over one-third of total foreign-held Treasuries. These two countries became so crucial that changes in their buying behavior were closely tracked by bond traders, macro strategists, and even U.S. policymakers monitored every shift in their portfolios.

The Shift in 2024

Starting in late 2022 and accelerating through 2024, press releases from the U.S. Treasury’s TIC (Treasury International Capital) reports started revealing a clear trend: EM economies were steadily and systematically reducing their holdings of U.S. Treasuries.

• Once the single largest foreign holder of U.S. Treasuries, China's holdings fell below $800 billion ($760.8bn) in early 2024, their lowest point in the last 15 years, down from over $1.3 trillion at the peak in 2013. The ongoing trade tensions, sanctions risk, and technological decoupling (semiconductors) have all contributed to a recalibration of China's foreign reserve structure.

  
  

• While China leads in absolute scale, India ($225.7 billion) and Brazil ($199.1 billion) are notable for their active reallocation of reserves into Gold (India’s central bank added over 40 tonnes of gold in 2023 alone), Renminbi (RMB) assets, and Euro-denominated bonds (effort to reduce dollar concentration risk).

• Russia, following the 2022 invasion of Ukraine, Western nations froze over billions of its central bank reserves, most of which were held in Western financial institutions and dollar-denominated assets. The consequences were immediate; it effectively eliminated all exposure to U.S. sovereign debt (TIC data shows negligible holdings in 2024), increased gold reserves significantly, and deepened monetary ties with China. Russia now settles much of its oil and gas exports in yuan or rubles, thereby further diminishing the need to hold U.S. dollars or Treasuries.

  
  

While some saw these changes as short-term responses to liquidity needs or geopolitical tensions, a deeper pattern is emerging: EM countries are actively rethinking their reserve strategies.

• Geopolitical Risk and the Weaponization of Finance: When the U.S. and EU froze hundreds of billions in Russian reserves in response to the Ukraine invasion, it sent a clear message: dollar assets are no longer politically neutral. "U.S. dollar reserves are safe, until they’re not!" For many EM policymakers, the risk/possibility of having reserves seized or sanctioned changed the perception they view U.S. Treasuries as assets that carry geopolitical risk (weaponization of finance), and not just market risk.

  
  

• Growing Concerns Over U.S. Fiscal Health: With U.S. national debt now over $36 trillion and fiscal deficits exceeding 6% of GDP annually, concerns over debt sustainability and rising interest costs (long-term fiscal discipline) have rattled confidence—rising interest costs, higher inflation expectations, and the threat of future financial repression are making foreign investors more cautious, especially when it comes to holding long-term U.S. bonds.

  India, for instance, holds 98.6% of its U.S. Treasury exposure in long-duration securities, highlighting the vulnerability of EM portfolios to shifts in long-term U.S. rates.

  
  

• A Shift Toward Diversified, Multi-Asset Reserve Strategies: Many EM central banks are rethinking their reserve portfolios (started rebalancing) to include a broader mix of assets:

  
  

  • Gold: Central bank gold purchases hit record levels in 2024-25, led by EM economies.

    
    

  • Chinese Renminbi (RMB): Still a small portion of global reserves, but its role is expanding through bilateral trade agreements, especially within BRICS (Brazil, Russia, India, China, and South Africa) countries, and even the UAE-India.

    
    

  • Other Currencies: The euro, Swiss franc, and even some digital assets are now being considered in new reserve allocation strategies.

This is not a short-term hedge—it’s a long-term diversification away from U.S. financial dominance.

The trend is not lost on the bond market. As EM central banks shift from being structural buyers of Treasuries to net sellers, pressure is quietly mounting on the demand side. The ripple effects are significant:

• More Volatile Yields: With the reduction in steady, price-insensitive buyers, Treasury auctions are becoming more fragile. When demand falls short, yield spikes are happening more often.

  
  

• Risk of Steepening Yield Curves: A drop in demand for long-term Treasuries among foreign buyers could lead to steeper curves, resulting in higher long-term rates. That raises borrowing costs for the U.S. and adds to the strain on its already stressed fiscal position.

  As yields rise, the mark-to-market value of Treasuries held by EM central banks declines. That can push them to sell even more, reinforcing the cycle and adding further pressure to the market, creating a negative feedback loop.

  
  

When emerging markets stop buying (or worse, start selling) U.S. Treasuries, it reshapes the demand curve. That leaves the U.S. government increasingly dependent on domestic buyers (U.S. institutional banks and pension funds), the Federal Reserve, which may have to return to Quantitative Easing-style interventions, and private foreign investors, who won’t step in without higher yields to offset the risks. That’s a risky setup!

If a Treasury auction comes up short, not enough buyers show up to accept the offered yields, the entire bond market could reprice overnight. We've seen a glimpse of this during the U.K.'s mini-budget crisis in 2022 and again in recent U.S. long-duration bond auctions that drew weak demand.

This isn’t just another macro policy, it’s the start of a global monetary realignment. What started as a quiet shift/adjustment is turning into a broader reordering of how reserves are managed around the world. And the bond market, often the most forward-looking market of all, is already responding.

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