The Shift in Foreign Demand for U.S. Treasuries: Implications for Global Capital Flows and Bond Markets

The July 2025 Treasury International Capital (TICS) report revealed a striking divergence in global capital flows. While net foreign purchases of U.S. long-term securities surged to $49.2 billion—driven by $72.4 billion in private-sector demand—the broader picture of risk-asset rotation tells a more nuanced story of portfolio reallocation. This apparent paradox—strong Treasury demand amid broader market shifts—highlights the evolving dynamics of global capital allocation and the interplay between safety-seeking behavior and risk-off sentiment.

The TICS Inflow Slowdown: A Closer Look

According to the U.S. Treasury's July report, net foreign purchases of U.S. Treasury bonds and notes reached $58.2 billion, far exceeding forecasts of a $0.8 billion outflow and reversing the previous month's -$5.0 billion net salesTreasury International Capital Data for July^[1]. This inflow was fueled by private investors, particularly pension funds and institutional buyers, who added $72.4 billion to their U.S. bond holdingsUS Fund Flows: Here’s Where Investors Put Their Money in July^[2]. Meanwhile, foreign official institutions contributed $6.4 billion, though this pales in comparison to historical levels of central bank demandForeign Demand for U.S. Treasuries: Facts vs. Fears^[3].

However, the broader TICS net inflow for the month was a modest $2.1 billion, reflecting a $20.5 billion outflow from foreign official investors—likely central banks reducing dollar reservesA ‘reverse conundrum’ and foreign official demand for US Treasuries^[4]. This duality underscores a key trend: while private capital remains attracted to U.S. Treasuries, official demand is softening, potentially due to geopolitical realignments and diversification away from dollar assetsForeign demand for US Treasuries holds off bond …^[5].

Broader Capital Flows: Risk-Asset Rotation in Action

July's TICS data must be contextualized within a broader shift in global capital flows. U.S. equity funds experienced massive outflows, with nearly all categories—except large blend funds—recording redemptions totaling over $23 billion. Conversely, international equity funds attracted $11 billion in inflows, reflecting a strategic pivot toward non-U.S. markets amid concerns over U.S. inflation, tariffs, and tech sector volatility.

Bond markets also signaled a risk-off environment. Intermediate core bond funds gained over $20 billion in July, while long-term bond funds faced a 7% organic decline in assets—the fifth consecutive month of redemptions. This trend aligns with investor caution about inflation and the anticipated impact of U.S. tariffs, which have reduced appetite for long-duration assets. Meanwhile, derivative-income funds, particularly those using covered-call strategies, saw record inflows of $7.5 billion, as investors sought downside protection.

Structural Drivers and Contradictions

The resilience of foreign demand for U.S. Treasuries—despite these broader shifts—stems from structural advantages. U.S. Treasuries remain the largest and most liquid government bond market, offering unmatched depth and a yield premium compared to alternatives like German or Japanese bonds. Japanese investors, for instance, have added over $60 billion in U.S. bonds since early May, reflecting a search for yield amid Japan's near-zero interest rate environment.

Yet contradictions persist. The decline in foreign official demand—evident in reduced dollar reserves at the Federal Reserve—could eventually push long-term Treasury yields higher, as central banks scale back purchases. Additionally, the rise of stablecoins tied to U.S. dollar assets and potential regulatory changes in U.S. banking may further complicate the outlook.

Implications for Bond Markets and Global Capital Flows

The July TICS data suggests a “reverse conundrum” scenario: foreign demand for Treasuries is propping up the bond market even as broader capital flows signal risk aversion and portfolio diversification. For bond investors, this implies a delicate balance between short-term safety and long-term inflation risks. The $2.1 billion net TICS inflow, though modest, reflects a tug-of-war between private-sector demand for U.S. assets and official-sector divestment.

For global capital flows, the shift toward international equities and intermediate bonds indicates a growing preference for diversification and income generation. The U.S. dollar's weakening trend has also incentivized investors to allocate to unhedged foreign bonds and emerging-market assets. These trends could persist if U.S. macroeconomic risks—such as inflation and fiscal deficits—remain unresolved.

Conclusion

The July TICS report underscores a pivotal moment in global capital allocation. While U.S. Treasuries continue to attract private investors, the broader market is recalibrating toward international equities, intermediate bonds, and derivative strategies. This reallocation reflects both the enduring appeal of U.S. debt and the growing recognition of systemic risks in the American economy. For investors, the challenge lies in navigating these crosscurrents—leveraging the safety of Treasuries while hedging against inflation, tariffs, and the inevitable shift in global capital flows.