Currency Recycling Shapes Treasury Holdings

China's holdings of US Treasury debt have significantly decreased since peaking in 2012, driven by reduced trade with the US post-trade war, which limits their recycling of dollars into Treasuries. As purchases from China decline, so does their investment in US debt. Contrastingly, Japan has risen to become the largest holder of US Treasuries through a yen carry trade, leveraging low borrowing costs to invest in higher-yielding securities like Mexican treasury bills. Despite expectations that the unwinding of this trade could negatively impact bonds, bond prices are rallying, suggesting other influencing factors, such as a slowdown in commodity and energy prices linked to a contracting Chinese economy, may be supporting bond market strength.