Largest “Foreign” Holders of US Treasuries, incl. US Hedge Funds in the “Basis Trade” & US Companies with Overseas Entities

How much of that foreign demand for US Treasuries is actually “foreign?” Less than it seems. Here are some clues.

By Wolf Richter for WOLF STREET.

All foreign investors combined added $18 billion of Treasury securities to their holdings in May, bringing them to $9.37 trillion. Over the past 12 months, their holdings increased by $549 billion (red line in the chart). $7.92 trillion (84.5%) were long-term Treasury notes and bonds with terms between 2 years and 30 years (blue). The remaining $1.45 trillion (15.5%) were short-term Treasury bills, according to Treasury Department data today.

The $7.92 trillion in notes and bonds are valued at market value in this data. The record was in February at $9.49 trillion, after which bond prices dropped substantially through May as yields surged, including the 10-year Treasury yield which surged by 50 basis points.

So the dollar valuation of those $7.92 trillion of notes and bonds dropped by $203 billion in the three months of March, April, and May, according to the Treasury Department data. Despite this $203 billion drop in valuation, total holdings dropped by only $118 billion over this period, indicating that foreign holders added to their holdings over this period even as prices dropped.

“Private foreign” investors were the driver behind the multi-year surge in foreign holdings: in May alone, they increased their Treasury holdings by $77 billion despite the valuation decline in May, to a record $5.52 trillion. Year-over-year, their holdings have surged by $378 billion, or by 7.4% (red in the chart below).

These private “foreign” investors include huge US hedge funds domiciled in the Cayman Islands, such as those engaged in the gigantic “Treasury Basis Trade,” and US companies with financial entities registered in Ireland and other financial centers, to legally dodge US federal income taxes.

“Foreign official” holders, such as central banks and government entities decreased their holdings by $58 billion in May and by $29 billion year-over-year, to $3.85 trillion – well below their holdings a few years ago (blue line).

The percentage-share of marketable Treasury securities held by foreign entities, including US hedge funds domiciled in the Cayman Islands and US companies with entities in Ireland, has been wobbling along between 31.5% and 33.8% since early 2021. In May, the share inched up to 32.2%.

In other words, these foreign entities – including the US hedge funds and companies – have kept up with the ballooning US debt, but no more than that.

The plunge in the share of holdings during the first three months of the pandemic was the result of the US government issuing over $3 trillion in Treasury securities in March, April, and May 2020, while the Fed purchased over $3 trillion of Treasury securities in the open market at the same time. As a result of the debt increasing, but with the Fed taking that increase on its balance sheet, foreign entities’ share plunged from 40% to 33%.

Treasuries held by entities in the US keeps the interest that the Treasury Department pays on those securities in the US, and that interest supports spending and investment and economic growth in the US. That’s the benefit of Treasuries being held by domestic investors.

When foreign entities hold Treasuries, the interest paid goes to these foreign entities and may not contribute much to the US economy. However, foreign demand helps keep the yield low, and lower yields slow the blistering growth of the interest expense.

China & Hong Kong ease away, Euro Area piles in.

Mainland China and Hong Kong combined added $11 billion in May, but shed $54 billion year-over-year. Their combined holdings are now down to $931 billion. The long-term trend is very clear (blue linen in the chart below).

Hong Kong has long served as a global financial center. $272 billion of the $931 billion of Treasuries were registered there; and $659 billion were registered in Mainland China.

The Euro Area has been loading up on Treasury securities year-after-year. In May, holdings rose by $17 billion, to $2.0 trillion. Year-over-year, holdings rose by $133 billion (red).

Most of this occurred in financial centers – and thereby includes US entities with accounts in these financial centers. The three financial centers Luxembourg, Ireland, and Belgium, and France, whose banking system also has functionalities of a global financial center, accounted for 82% of the Euro Area’s total holdings. More in a moment.

But Germany, a big exporter to the US and the largest economy in the Euro Area, only held $102 billion.

Japan’s holdings of Treasury securities plunged by $58 billion in May, when the Ministry of Finance engineered a record market intervention of ¥11.735 trillion ($72 billion), selling USD assets and buying yen with the proceeds, to put a floor under the yen, which worked only briefly, before the yen re-skidded further.

Japan’s holdings of $1.14 trillion in May were the lowest since May last year. But its holdings have remained in the range between $1.0 trillion and 1.3 trillion for many years, amid wild fluctuations.

The seven largest financial centers added another $33 billion in May and $293 billion year-over-year, to bring their combined Treasury holdings to a record $3.24 trillion. They more than doubled their holdings over the past 10 years. A big portion of Treasuries at these financial centers are held by US entities.

The Cayman Islands are where US hedge funds are domiciled, including those that are engaged in the huge “basis trade.” More on that situation in a moment.

Ireland is a favorite for US Big Pharma and Big Tech to store their profits. Belgium is home to Euroclear, which has $40 trillion in assets under custody for companies, governments, family offices, wealthy individuals, and other entities around the world.

Changes in May, and holdings:

United Kingdom: +$11 billion, to a record $949 billion
Cayman Islands: -$0.4 billion to $471 billion… but wait, it’s actually closer to $2 trillion, according to the Federal Reserve’s analysis of the basis trade (see below).
Belgium: +$12 billion to $472 billion
Luxembourg: +$5 billion, to $436 billion
Ireland: +$12 billion to $357 billion
Switzerland: -$7 billion to $281 billion
Singapore: +$0.5 billion to $278 billion.

The “basis trade” and the Cayman Islands.

We’ve discussed this before: Many US hedge funds are domiciled in the Cayman Islands, and their Treasury holdings would normally count as holdings in the Cayman Islands. But the Treasury Department’s Treasury International Capital (TIC) System, on which these numbers here are based, fails in properly attributing all the Treasury securities held by Cayman-domiciled US hedge funds to the Cayman Islands. Instead, they show up as Treasuries held domestically in the US.

This was revealed by a Federal Reserve Bord of Governors analysis last October, which showed that Treasury holdings by Cayman-domiciled US hedge funds were undercounted by $1.4 trillion at the end of 2024.

At the end of 2024, the TIC system attributed $379 billion to the Cayman Islands. The Federal Reserve analysis showed that the total was actually close to $1.8 trillion. The report relied on other government data that was better able to track the Cayman-held Treasuries, according to the report.

These Cayman-domiciled US hedge funds engage in the highly leveraged massive “Treasury basis trade.” They’re long (they buy) Treasury securities and are short (they sell) Treasury cash-futures and make money off the spread.

In normal times, the basis trade provides liquidity to the Treasury market. During times of turmoil, such as in March 2020, the basis trade caused the Treasury market to seize – and the Fed ended up stepping into it to get it going again.

The United Kingdom is actually the “City of London” financial center that holds assets of global entities, including US entities. Its Treasury holdings rose by $11 billion in May, and by $139 billion year-over-year, to a record $949 billion, despite the drop in valuations of Treasury securities.

Canada’s holdings have been yoyoing up and down since early 2025. In May, they jumped by $39 billion, to $436 billion, after the plunge in April. The high was in September last year ($476 billion).

France’s holdings were roughly unchanged in May at the near-record level of $393 billion, up $18 billion year-over-year.

Taiwan’s holdings rose by $5 billion, to $306 billion, were roughly unchanged year-over-year, and down a little from the peak in February:

Norway’s holdings declined by $7 billion in May, to $207 billion, up by $20 billion year-over-year. The tiny country of Norway is home to the world’s largest sovereign wealth fund, the Government Pension Fund Global, also known as the Oil Fund, which has over $2.1 trillion in assets under management.

India’s holdings were roughly unchanged in May, at $181 billion, down by $54 billion year-over-year.

Brazil’s holdings have been roughly unchanged since October last year, at $169 billion in May, down by $43 billion year-over-year, and down by 46% from the peak in 2018.