Foreign Investors Dump $29 Billion in Short-Term Treasuries: Why Is the US Betting on Stablecoins to Step In?

Original author: Andjela Radmilac

Original translation: Saoirse, Foresight News

In June, foreign investors recorded a net inflow of $133.5 billion into US financial markets, but sold off $29 billion in short-term Treasury bills during the same period.

These two figures reflect two distinct capital flows within the same month: most of the inflows went into the US stock market, while demand for US government debt weakened significantly. Foreign buyers purchased $181.4 billion in US equities but only $6.8 billion in long-term Treasuries; on the short-term side, they reduced holdings of Treasury bills, which are often used as a cash reserve.

This divergence in capital flows also explains why stablecoins have been incorporated into the US government's debt management strategy. Stablecoin issuers like Tether and Circle allocate the majority of their reserve assets backing token value into short-term Treasury bills and similar assets. If overseas buyers continue to reduce their Treasury holdings, the growing stablecoin sector could become another substantial source of demand, potentially comparable to overseas capital. June data shows the industry already has sufficient scale, but recent token issuance growth has been minimal and does not explain the $29 billion sell-off.

Foreign Investors Prefer Equities Over Cash-Like Debt

The US Treasury International Capital report, abbreviated as the TIC report, is a monthly report recording capital flows between the US and the rest of the world. The report tracks both securities transactions and short-term banking flows, so the headline totals often mask underlying divergent investment decisions.

Summary of foreign investor capital behavior in June:

The $181.4 billion in equity investment exceeds the overall $133.5 billion net inflow because the total is the result of offsetting large inflows and outflows. Treasury bill sales and $34.4 billion in outflows from bank balance sheets offset some of the equity purchases; US residents also exported capital by purchasing foreign securities.

Despite the complexity of the statistical logic, the core message is clear: foreign investors continue to allocate to US assets, particularly favoring US corporate equities; but their willingness to allocate to government debt is low, and they are withdrawing from short-term debt instruments.

Short-term Treasury bills are debt instruments issued by the US government with maturities of one year or less. Due to quick principal repayment and ample market liquidity, Treasury bills are often considered near-cash substitutes, and central banks, corporations, money market funds, and stablecoin issuers are willing to hold these assets.

Foreign holdings of US short-term Treasuries fell from approximately $1.43 trillion in May to $1.40 trillion in June. The June reduction was about 2% of May holdings. This marks the second consecutive month of decline: foreign investors sold $43.5 billion in May and $29 billion in June, totaling about $72.5 billion over two months.

Existing data cannot directly determine the motivations behind the sell-off; it could be routine cash management or a shift in asset allocation to other categories. The aggregate data shows overseas capital taking a differentiated approach to US markets: buying equities, reducing Treasury bill holdings, but overall capital still flowing net into the US. Caution is also needed when interpreting Treasury country-level data, as securities are recorded through custodians, which can obscure the actual country of beneficial ownership.

How Stablecoins Convert Dollars into Treasury Bill Demand

A simple transaction illustrates the link between stablecoins and Treasury bills: a user pays $1 to an issuer and receives 1 dollar-pegged stablecoin. The issuer assumes the obligation to redeem $1 upon user request, so it invests reserve funds in assets that can be quickly liquidated. Short-term Treasury bills fit this need perfectly; it is difficult to find other assets that can be converted to cash as efficiently and quickly as Treasury bills.

Once the issuer purchases Treasury bills, user demand for digital dollars is indirectly converted into demand for US government debt. Users do not need a securities account or access to the Treasury's direct investment platform; all reserve asset investments are handled by the stablecoin company behind the scenes.

The GENIUS Act formally establishes this operating model, requiring regulated payment stablecoins to hold highly liquid reserves. Proposed rules released by the US Treasury on August 17 further refine the federal regulatory framework, listing cash, short-term Treasuries, and related repurchase agreements as preferred reserve assets.

CryptoSlate previously analyzed that the bill opens a federal regulatory pathway for dollar tokens while delegating reserve asset design and eligibility details to regulators.

Tether's size alone demonstrates the scale of leading issuers. Its second-quarter attestation report shows direct holdings of short-term Treasury bills amounting to $114.96 billion, plus $25.62 billion in overnight and term repurchase positions. The $29 billion sold by foreign investors in June is roughly equivalent to one-quarter of Tether's direct Treasury bill holdings.

This comparison is for scale reference only; TIC report data does not prove that bonds sold by overseas institutions were directly purchased by Tether or other issuers.

Circle, the issuer of USDC, employs a similar reserve model. According to its reserve disclosure documents, the vast majority of USDC reserves are held in the Circle Reserve Fund, managed by BlackRock, which is a government money market fund that can allocate to cash, short-term Treasury bills, and overnight Treasury repurchase products.

Although Tether and Circle have different reserve structures, both convert market demand for digital dollars into allocation demand for US cash-like assets.

Stablecoins Poised to Become the Buyer the US Government Hopes For

It is not difficult to understand why the US government has high hopes for stablecoins. Overseas users can hold and transfer dollar stablecoins without personally purchasing US Treasuries; stablecoin issuers invest reserve funds into Treasury bills or the repo market. Dollars can circulate to overseas users, while the buying demand generated by reserves flows back into the US financial system.

However, this mechanism only creates new Treasury buying when the stablecoin supply expands or issuers reallocate from other assets. At the end of the second quarter, Tether's USDT circulating supply was $184.6 billion, an increase of only about $446 million from the end of the first quarter. DefiLlama data shows that as of August 21, the total stablecoin market cap was approximately $302.1 billion, down 0.14% over the past thirty days.

These figures refute a simple assumption: new token issuance did not absorb the $29 billion in Treasury bill selling pressure; issuers merely rebalanced existing reserves. Public data also provides no evidence that overseas holders directly sold bonds to stablecoin companies.

This mechanism also carries the risk of operating in reverse: when a large number of users redeem stablecoins, issuers need to pay out cash and may sell Treasury bills or allow bonds to mature. Stablecoins can become an important buyer of US Treasuries, but they will also experience cyclical fluctuations in buying and selling.

The next TIC report will be released on September 16, covering July data. Two key indicators to watch: foreign institutional holdings of short-term Treasury bills and the total stablecoin supply. If overseas investors reduce holdings for a third consecutive month while stablecoin supply remains flat, the demand gap for Treasuries will persist; if stablecoin supply rises and issuers' disclosed Treasury positions expand accordingly, it would indicate that this new class of buyers is increasing its participation. Due to custodial recording practices, the two data sets are difficult to match precisely.

In summary, foreign investors continued to allocate to US assets in June, but capital flowed heavily into equities while reducing holdings of short-term government cash-like bonds. Stablecoin issuers hold tens of billions of dollars in Treasury positions and are already a significant participant on the demand side of the Treasury market. Tether's second-quarter growth is entirely insufficient to explain the large-scale sell-off in June.

In the short-term Treasury market where overseas demand is weakening, the US is building regulatory rules for a potentially massive new buyer. The link between digital dollars and US government financing is the core reason why this $29 billion Treasury bill sell-off deserves attention.