China has reportedly advised its banks to reduce their exposure to U.S. Treasury bonds, citing concerns about market volatility. This guidance from Chinese regulators reflects Beijing's increasing caution regarding the risks associated with holding large amounts of U.S. debt. The advice was given to financial institutions to limit their purchases of U.S. Treasuries and for those with large holdings to gradually sell them.

The recommendation applies specifically to banks' investment portfolios and does not affect bonds held directly by the Chinese government. This message has been communicated to major banks over recent weeks, highlighting Beijing's apprehension that excessive exposure to U.S. Treasuries could leave banks vulnerable to market swings.

This decision comes amid a broader debate among global investors about whether U.S. Treasuries and the dollar remain a safe and attractive haven, as they once were. China's move appears to be aimed at diversifying financial risk, rather than signaling a geopolitical strategy or a loss of faith in the United States. There were no specific sales targets or timelines set.

Following the report of this news, U.S. Treasury prices experienced a decline, and yields increased. The 10-year U.S. Treasury yield rose by 0.04 percentage points to 4.25%, and the 30-year yield increased by 0.03 percentage points to 4.88%. The Bloomberg Dollar Spot Index also experienced a slight dip of 0.2%.

According to recent data, Chinese banks hold approximately $298 billion in dollar-denominated assets, but it's unclear how much of that is specifically in U.S. Treasuries. As of November, foreign holdings of U.S. Treasuries reached a record $9.4 trillion, more than $500 billion higher than the previous year.

China's concerns are emerging as global investors are increasingly questioning the U.S. government's fiscal discipline and certain policies that could impact the dollar and the independence of the Federal Reserve.

Over the past decade, China has steadily reduced its U.S. Treasury holdings, and has been overtaken by Japan and the United Kingdom. China's holdings have nearly halved from their peak in 2013, reaching their lowest level since 2008.

The onshore renminbi strengthened to 6.9284 per U.S. dollar, the strongest level since May 11, 2023. UBS analysts noted that the news of China curbing U.S. Treasury exposure pushed the dollar lower against the renminbi. They added that the move is about diversifying market risk and not a reflection of geopolitical maneuvering or a lack of confidence in U.S. creditworthiness. The renminbi has been gaining against the dollar, helped by dollar weakness, strong exports from China and growing appeal of China's capital markets.

The Kobeissi Letter highlighted China's directive to limit purchases of U.S. bonds, which some analysts view as a "massive red flag". If China, as the second-largest holder of U.S. debt, reduces its participation, it could create "insane" yield pressure. Some believe that this could lead to a structural change in global collateral.