Countries and territories most closely aligned with the United States have sharply reduced their purchases of US government bonds, raising questions about Washington’s ability to finance its growing debt at relatively low borrowing costs.
The countries recorded net purchases of $174.3 billion in US Treasury securities, excluding bills, between January and August 2026, a decline of more than 60 per cent from the same period last year and the lowest level for the period since 2021, according to an analysis of US Treasury and State Department data reported by Bloomberg.
The pullback was particularly pronounced in Asia, where Japan, South Korea and Taiwan reduced their exposure to US government debt amid weakening local currencies, rising domestic bond yields and growing interest in alternative investments.
Japan, the largest foreign holder of US Treasuries, recorded net purchases of just $389 million during the eight-month period, representing a 99 per cent decline from a year earlier.
South Korea, meanwhile, recorded net sales of $23.8 billion, its largest net outflow for the January-August period since records began in 1977. Taiwan also shifted from a net buyer to a net seller.
The figures suggest that Washington can no longer rely on its closest economic and strategic partners to absorb its government debt at the same pace as in previous years.
The development comes as US federal debt has surpassed $40 trillion, increasing the government’s dependence on investors to finance its spending.
Although overseas investors continue to hold substantial amounts of American debt, their declining share of the market could make borrowing costs more sensitive to changes in investor sentiment.
Market participants attribute the shift to several factors, including currency pressures, more attractive returns in domestic bond markets, increased demand for equities and uncertainty surrounding US economic and trade policies.
The policies of President Donald Trump, particularly tariffs and concerns about the dollar’s long-term outlook, have added to investor caution. At the same time, rising bond yields in Japan and Europe have given investors more options beyond US government securities.
Masahiko Loo, a senior fixed-income strategist at State Street Investment Management, said the US Treasury market was not necessarily losing foreign investors but was attracting less automatic demand from traditional buyers.
According to Loo, uncertainty surrounding US policy has made investors more reluctant to maintain large, long-term positions in American government debt or automatically reinvest surplus funds in Treasury securities.
Currency pressures have also influenced investment decisions across Asia. The weakening yen has reduced Japanese investors’ purchasing power abroad, while domestic bond yields have climbed to multi-decade highs, making Japanese government securities more attractive relative to foreign debt.
South Korea’s central bank said in September that it planned to broaden investments beyond US bonds for part of its reserves managed by domestic asset managers.
Brad Setser, a senior fellow at the Council on Foreign Relations and a former US Treasury official, said South Korean investors were increasingly favouring equities, while Taiwanese funds were directing more money into stocks and deposits.
He described the trend as part of a broader shift in which foreign assets are increasingly held through pension funds, state-owned banks and other large institutions rather than concentrated in central bank foreign exchange reserves.
The change does not necessarily indicate a broad retreat from the US dollar, but it could weaken the stable official demand that has traditionally supported the Treasury market.
The analysis classifies countries according to how frequently their votes on key United Nations resolutions align with those of the United States. It covers 57 countries and territories and includes purchases and sales of Treasury securities with original maturities exceeding one year by both public and private investors.
Consequently, the figures do not establish whether governments themselves are reducing their holdings or whether private investors are primarily responsible for the changes. The data may also attribute securities to financial centres where they are held through custodians rather than to the countries of their ultimate owners.
Despite the pullback among US-aligned countries, other investors have continued to support the market. Countries classified as least aligned with Washington recorded net purchases of $17.1 billion between January and August, reversing four consecutive years of net selling over the same period.
China remained a major net seller, while the United Kingdom, Hong Kong and India were among the largest buyers.
Private investors, including hedge funds, banks and mutual funds, have also assumed a greater role in financing the US government. Their share of federal debt has risen to about 70 per cent, close to its highest level since 1990.
However, private investors are generally more sensitive to prices and returns than central banks and other official institutions, meaning they may demand higher yields before committing additional funds.
The benchmark 10-year US Treasury yield recently stood at about 5.01 per cent after rising above five per cent earlier in the year, reflecting mounting concerns about the outlook for borrowing costs, inflation, monetary policy and the country’s widening fiscal deficit.
Foreign investors held approximately $7.85 trillion in US Treasuries as of August, close to a record high. However, their share of the overall market has fallen from a peak of 52 per cent in 2012 to less than one-third.
Robert Tipp, head of global bonds at PGIM, said the availability of alternative investments capable of absorbing large amounts of capital remained limited, adding that purchases by other investors had helped offset reductions by some countries.
The pullback therefore does not mean that the United States is running out of buyers or that the dollar is about to lose its position as the world’s dominant reserve currency. Foreign investors are also continuing to channel funds into US equities and corporate debt.
Nevertheless, a sustained decline in demand from traditional overseas buyers could force the US government to offer more attractive yields to secure financing, increasing borrowing costs across the economy and potentially affecting global financial markets.
Shoki Omori, Deutsche Bank’s chief Japan fixed-income strategist, said the central issue was not whether the US government could finance itself, but how much it would have to pay and how volatile those costs might become..
