According to the Infranomics video analysis, it is difficult to determine with certainty who is selling U.S. Treasury securities. However, the author explores the possibility that China, Europe, and Japan are involved in such sales. His reasoning is based on an observed divergence between interest rate differentials and the strength of local currenciesduring the period in which the yield on the 10-year U.S. Treasury bond was rising.
In detail:
- China: Although the interest rate differential between China and the U.S. was narrowing—which would typically lead to capital outflows from China and a weakening of the yuan—the Chinese currency was actually strengthening. This counterintuitive behavior suggests that China may have sold U.S. Treasuries (dollar-denominated assets), converted the proceeds into yuan, thereby weakening the dollar and strengthening the yuan.
- Europe: A similar pattern emerged in Europe. Interest rate differentials between European countries and the U.S. did not fully justify the euro’s strength. This may imply that European entities also sold U.S. Treasuries and exchanged the dollars for euros, contributing to the euro’s appreciation.
- Japan: The same divergence was noted with Japan. The shrinking interest rate gap should have weakened the yen, yet the currency was gaining strength. This could be explained by Japan selling U.S. bonds and converting dollars into yen.
The author stresses that this is a tentative interpretation based on a single indicator—interest rate differentials—over a relatively short time frame. Many other factors affect currency and bond markets. Still, the simultaneous divergence across all three regions may suggest a coordinated or parallel wave of U.S. Treasury sales by foreign central banks or institutions.
He concludes that only future Treasury International Capital (TIC) data releases, which are published quarterly with a lag, will clarify who was actually selling. Nevertheless, the weakness of the U.S. dollar observed during this period lends support to the hypothesis of foreign selling.
A Reasoned Commentary on the U.S. Treasury’s TIC Report for January 2025
According to last Treasury International Capital Data for January
The latest Treasury International Capital (TIC) report offers a detailed snapshot of cross-border financial flows and investment dynamics between the United States and the rest of the world. The January 2025 data reveal some notable shifts in foreign engagement with U.S. assets, highlighting emerging trends in capital allocation and investor sentiment.
General Overview: Net Capital Outflow
In January 2025, the United States recorded a net capital outflow of $48.8 billion, broken down as follows:
- Net private outflows: $74.8 billion
- Partial official inflows (from central banks, sovereign wealth funds, etc.): $26.0 billion
This indicates a month of substantial capital withdrawal by private foreign investors, only partially offset by continued institutional purchases.
Breakdown: Long-Term Securities Activity
- Net sales of long-term U.S. securities by foreigners: –$45.2 billion
- Private foreign investors purchased $59.2 billion in U.S. securities—mainly corporate bonds and equities
- Official foreign institutions, by contrast, sold $59.0 billion, marking a politically meaningful retreat
- U.S. residents purchased $45.4 billion in foreign long-term securities, signaling strong outward capital movement
This pattern reflects a notable outflow of capital from the U.S. toward foreign markets, likely driven by the search for better returns or diversification opportunities.
Short-Term Instruments and Liquidity Preference
- Foreign holdings of U.S. Treasury Bills (T-Bills) increased by $32.3 billion
- Overall, foreign holdings of short-term U.S. dollar instruments rose by $53.9 billion
This suggests a preference for short-term, liquid assets—often seen as a “parking spot” for capital during uncertain periods—rather than a strong vote of confidence in U.S. long-term debt.
Banking Sector
- Net dollar-denominated liabilities of U.S. banks to foreign residents decreased by $57.5 billion
This withdrawal of foreign liquidity from the U.S. banking system may reflect increased caution or stress in global interbank dynamics.
Strategic Interpretation of the Data
Growing demand for short-term instruments suggests that in times of uncertainty, investors gravitate back toward liquidity and lower volatility assets.
Clear signs of short-term uncertainty or waning confidence among foreign private investors—particularly regarding long-duration U.S. securities and macro-sensitive sectors.
A divergence in behavior between private and official investors: while private actors remain engaged, official institutions are pulling back. This could reflect differing assessments of U.S. sovereign risk.
U.S. residents are increasing foreign asset exposure, which may indicate: expectations of appreciation in foreign currencies, dissatisfaction with domestic market outlooks, or simply a cyclical shift in allocation strategies.
What Happened in the U.S. Treasury Market?
According to the author, the U.S. bond market was experiencing a “meltdown”—a sharp and rapid decline in value. This was evident in two key developments:
- Rising Yields on Treasury Bonds: The yield on the 10-year U.S. Treasury note increased significantly. It’s important to remember that bond prices move inversely to yields: when yields go up, bond prices fall.
- Heavy Selling of Long-Term Treasuries: The author highlights the sharp drop in long-term Treasury securities (20- and 30-year bonds), as represented by the TLT ETF. Over just five trading days, the TLT fell by 9%.
This selloff was accompanied by a weakening of the U.S. dollar relative to other major currencies like the Swiss franc and the Japanese yen.
Another critical point the author raises is the occurrence of a “bear steepening” of the yield curve. The yield curve illustrates the relationship between interest rates of short- and long-dated bonds. A bear steepening happens when long-term yields rise faster than short-term yields—a movement typically interpreted as a bearish signal that may anticipate an upcoming economic recession.
Financial Leverage in the U.S. Treasury Market
Let’s talk about how leverage is widely used in the Treasury market, particularly by hedge funds and other financial institutions. The key mechanisms are as follows:
- Using Treasuries as Collateral: U.S. Treasury securities are considered high-quality collateral and are often used to secure funding in the repurchase (repo) market.
- Leverage Effect: Institutions borrow funds using Treasuries as collateral, allowing them to amplify potential returns—but also potential losses. The author notes that leverage in this market can reach levels as high as 30x, 40x, or even 60x the original capital.
- Impact of Falling Treasury Prices: As the value of Treasury collateral falls, the amount of leverage that institutions can maintain is reduced. In other words, falling collateral value means reduced borrowing capacity.
To clarify the concept, a helpful analogy: imagine using your $1 million home as collateral for a line of credit. If the home’s value suddenly drops to $600,000, your borrowing power and financial position would worsen dramatically. The same logic applies to the Treasury market: a drop in Treasury prices—used as collateral across the global financial system—can lead to liquidity stress and systemic strain.
The “Basis Trade”
The basis trade, a strategy in which hedge funds borrow in the repo market to buy Treasury securities (“cash Treasuries”), then use those securities as collateral to obtain more leverage. When Treasury prices fall sharply, the profitability of this trade diminishes, and the financial risk increases.
Summary
In short, the combination of rising yields and falling prices in U.S. Treasuries, along with the widespread use of leverage, is creating a potentially precarious situation. The author expresses growing concern that this dynamic could destabilize parts of the financial system, especially if liquidity tightens further or collateral continues to deteriorate in value.
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