• Ray Dalio warns that weakening demand from China and Japan could pressure U.S. borrowing costs.
  • Foreign holdings of Treasuries fell in July, but the decline was partly offset by rising U.K. holdings.
  • Analysts caution that holdings data do not equate to net sales; broader capital flows remain mixed.

Dalio Sounds Alarm on Foreign Demand for Treasuries

Billionaire investor Ray Dalio cautioned on Tuesday that U.S. Treasuries are vulnerable to waning demand from China and Japan, the two largest foreign creditors to the United States. Speaking to Bloomberg Television in Singapore, Dalio cited geopolitical tensions and Japan’s desire to repatriate capital as potential drivers of reduced appetite for U.S. government debt. His remarks come as the 10-year Treasury yield hovers near 5.3%, a level last seen in 2002.

“China’s geopolitical tensions with Washington and Japan’s desire to bring capital home could weaken demand for Treasuries,” Dalio said, according to people familiar with the matter. He also reiterated his forecast of a possible U.S. debt crisis within three years—a prediction he has made before, though it remains his own outlook rather than a consensus view.

The latest Treasury International Capital (TIC) data, which cover July, show that Japan’s holdings slipped to $1,103.9 billion from $1,116.7 billion in June, a decline of $12.8 billion. Mainland China’s stash fell to $618.0 billion from $633.4 billion, a drop of $15.4 billion. Together, the two countries account for a significant share of the $9.25 trillion in Treasuries held by foreign investors. Still, the overall foreign total dipped only modestly, from $9.30 trillion in June to $9.25 trillion in July, as the United Kingdom increased its holdings to $998.3 billion from $939.9 billion.

Context and Caveats

While the headline figures align with Dalio’s warning, the data do not establish a wholesale foreign retreat. Changes in reported holdings can reflect market value fluctuations, maturities, or custody arrangements rather than outright sales. The Treasury Department itself cautions against drawing precise country-level conclusions from TIC data. Moreover, July’s broader capital-flow figures were mixed: foreign private investors sold $29.1 billion of Treasury notes and bonds, but foreign official institutions bought $25.5 billion, and foreign Treasury-bill holdings rose by $38.8 billion.

Dalio’s assertion that foreign capital finances “about a third” of U.S. debt is his own characterization; the proportion varies depending on the debt measure and includes private investors as well as governments. His warning also comes amid a debate over fiscal credibility. Treasury Secretary Scott Bessent said on October 5 that economic growth and spending restraint would “very quickly” improve the borrowing trajectory, countering Dalio’s more dire assessment.

Japan’s Role and the Fed Backstop

Japan’s motives are not purely adversarial. The country confirmed that its July 31 yen intervention was coordinated with the U.S. Treasury, and it has drawn down foreign reserves to support the currency. A key safeguard is the Federal Reserve’s FIMA repo facility, which allows foreign central banks to obtain dollar liquidity against Treasury collateral without selling the securities outright. Japan has said it plans to use the facility in the future, potentially easing market pressure.

China’s holdings have declined from a peak of around $1.3 trillion in 2013, a long-running shift that reflects reserve diversification and strategic considerations. However, some Chinese holdings may be parked in third-country custody accounts, such as Belgium, so the mainland figure may understate actual exposure.

Market Implications and Upcoming Data

If foreign demand continues to soften, the U.S. government may need to offer higher yields to attract buyers, raising refinancing costs and pressuring other borrowers. Dalio argues that rising debt-service costs could crowd out spending and hit lower-income borrowers first. U.S. households could face tighter conditions for mortgages and auto loans, while technology companies seeking debt for AI infrastructure might encounter stiffer competition for capital.

The next key indicator is the August TIC report, scheduled for release on October 16. Investors will watch whether Japan and China continue to reduce their holdings and whether bill purchases offset declines in longer-term debt. Also in focus: further yen intervention and whether Japan taps the FIMA facility instead of selling securities. For now, the evidence points to a gradual shift in the composition of foreign demand rather than an abrupt funding crisis—but Dalio’s warning serves as a reminder that the bond market’s mood can change swiftly.

Correction: An earlier version of this article misstated the month of the latest TIC data. It covers July, not August.