U.S.-China: Deal or no deal?

The trade war appears to have taken somewhat of a breather, with the United States engaged in negotiations with dozens of economies during a 90-day ‘pause’ on reciprocal tariffs. Rhetoric coming from the White House appears to be more conciliatory on tariffs directed towards China. However, there remain many moving parts to the potential sectoral tariffs (particularly on pharmaceutical products, critical minerals and semiconductors) and markets will likely continue fluctuating as news comes in on the various trade deal negotiations. Policy uncertainty remains high and may remain a drag on markets and risk sentiment for some time to come.

In this note, we address some of the most frequently asked questions regarding the recent volatility in Treasuries, we look at the roles of China and Japan during this period, and set out the potential paths forward for tariffs and trade deals.

Is China selling U.S. Treasuries?

In markets, the theme of “sell America” seems to be the focus, as markets confront a rare trifecta of declining U.S. equities (absolutely and relative to the rest of the world), a weakening U.S. dollar and rising Treasury yields. According to Michael Cembalest, J.P. Morgan’s Chairman of Market and Investment Strategy, this “sell America” moment (in a 30-day time span) has only happened 13 times since 1970, and 2025 is the first time this phenomenon has occurred since 1981. Typically, Treasuries and the dollar tend to strengthen during risk-off periods. The decoupling of Treasury yields and the dollar, and the fact that Treasuries have not been a ‘safe haven’ during this equity sell-off has raised questions on whether investor confidence in this asset class is being shaken. The recent cross-asset pattern defies traditional, well-established relationships.

In the short-term, this phenomenon has also prompted a flood of questions around whether foreign investors (particularly China) have been selling or “weaponizing” their holdings of U.S. Treasuries in retaliation, or if this is part of the trade negotiations.

Regarding China in particular, the balance of payments is admittedly confusing and difficult to read. Right now, many are asking these questions in the context of immediate selling pressure, and that’s unknowable because there is no real-time data on buyers, sellers or holdings. However, we think it’s unlikely that China is selling. Reserve managers tend to hold Treasuries at the short end of the curve, not the 10 or 30-year, which are the parts of the market that have been selling off the most. Furthermore, China has always been reluctant to sell en-masse, because the market can’t absorb such a large amount so quickly as it would cause their remaining dollar assets to depreciate and the value of their remaining reserves to decline. Lastly, where could China go if not the USD? They aren’t managing their currency against the EUR and there’s not a liquid enough market in that currency to absorb all the flows.

Importantly, China has not been structurally reducing its holdings of U.S. debt, contrary to common perception. The official data shows reserve holdings declining since 2014, but this is misleading. China wants to show declining holdings because it’s not politically convenient to show that they are a) continuing to build their reserves, or b) plowing excess savings into the sovereign debt of their main geopolitical rival. For these reasons, they disguise reserve assets by holding “shadow reserves” either through FX held off the PBOC’s balance sheet, or FX bought by the state banks, which act to stabilize the exchange rate, or FX held in custody in Europe to disguise the official end-owner. The non-reserve foreign assets of institutions controlled by China’s central government – the large state commercial banks, the state policy banks, and China’s sovereign wealth fund – are substantial. 

A big part of the Treasury portfolio is those held by offshore custodians, and it started precisely when the U.S. started producing detailed monthly data of overseas foreign holdings in 2011. By just including what’s likely held in custodial centers, total holdings of U.S. Treasuries has remained stable.

If not China, is Japan selling U.S. Treasuries?

Looking through the weekly flow and allocation data that aggregate ETFs and mutual funds, we can observe that Treasuries have experienced some selling, likely by foreign investors. EPFR data shows cumulative selling of around USD25bn for the weeks ending April 9 and April 6.

Although data collection methods and periods do not coincide perfectly, it would appear that the bulk of the outflow came from Japan, particularly Japanese private investors selling long-dated Treasuries. Japan’s Ministry of Finance data shows that Japanese investors net sold about USD20bn of long-dated Treasuries over the weeks ending April 4 and April 11. In a longer-term context, more concerted selling occurred in 2022 on the back of rapid interest rate hikes. Although, notably in 2022, the sell-off in Treasuries was accompanied by meaningful USD strength, hence mitigating the pain for Japanese portfolios.

Japanese institutional investors, including banks and life insurers, have started repatriating U.S. fixed income allocations, rotating into Japanese Government Bonds (JGBs) and engaging in fiscal year-end profit booking. Concurrently, there has been a shift from long-end Treasuries to short-dated bonds in anticipation of yield curve steepening. European funds have also played a role in fixed income repatriation, reflecting a structural shift towards increased home bias after prolonged U.S. fixed income overweights.

In our view, a lot of the recent sell-off can be explained by foreign investors requiring a higher risk premium for U.S. debt given persistent long-term fiscal concerns. For Japanese investors, the yield pickup also needs to be justified after meaningful hedging costs. This perception of risk premium is mostly driven by policy risks and a higher degree of market volatility.

From a longer-term perspective, Japanese investors are facing tectonic shifts in their home market. As a result of a gradual interest rate normalization process, 30-year Japanese Government Bond (JGB) yields are now above 2.5%, and the 10-year yield has sustained above 1% since late 2024. Over a medium-term perspective, the prospect of a more de-synchronized monetary policy cycle (Fed cuts and BoJ hikes) could result in narrower interest rate differentials, causing Japanese investors to repatriate more capital back home.

That said, we’d note that recent trends are primarily driven by private sector asset allocation decisions, not sovereign actions to weaponize Treasury holdings. In the case of Japan, addressing tariff uncertainties and potential JPY appreciation during global risk-off events can be also managed through increased FX hedging (forward FX sales) rather than outright sales of U.S. Treasuries.

Over the longer-term, fundamental drivers such as the U.S. macro outlook and Fed policy expectations will likely still be the main drivers of Treasury yields.

Are trade deals imminent?

As of the time of writing, there were reports that the Trump administration is close to signing general agreements with Japan and India, but they could fall short of being full trade agreements. These are likely to be high-level MOUs that provide a framework for the negotiations. Additionally, limited bandwidth at the relevant trade agencies will likely make it a challenge to negotiate multiple deals at once. Treasury Secretary Bessent also reportedly said that the tariff standoff with China is unsustainable, and that he expects the situation with Beijing to de-escalate. However, Bessent also said President Trump hasn't offered to lower U.S. tariffs on China on a unilateral basis and added that tariff levels will likely decrease mutually, with the Trump administration looking at factors beyond tariffs, including non-tariff barriers and government subsidies.

Bessent likely recognized that the current U.S.-China tariff levels are unsustainable. He remarked that tariff rates at these levels amount to a full and sudden trade blockage and this is not what either side of the negotiating table wants. Neither country is advocating for complete economic decoupling. In our view this is largely recognized by both sides, and tariff rates will likely have to come down at some point. It is likely that Trump increased tariffs for negotiating leverage, but as could have been predicted, retaliation then takes on a life of its own – making it harder to find an off-ramp for de-escalation.

No formal negotiations between the U.S. and China have started. There is optimism that talks could begin at some point, but we are not interpreting Bessent's remarks that anything is currently happening or could imminently happen. He said they want to make considerable progress on the "14 important trade partners" first, but also start finding ways to de-escalate with China.

He continued to advocate that the U.S. is pushing for a more balanced trading relationship and that any deal would have to address economic imbalances. This will likely make any deal difficult to achieve, similar to the last trade war. It’s also not clear how much they want to prioritize fewer imports from China vs more exports to China, and additionally it's not clear how much they might focus on structural issues. Any future deal will likely have a bit of both. Pulling this all together, it’s still unclear whether the goal is a deal, or a strategic decoupling. It’s possible the administration is still not sure.

China has also maintained a relatively hawkish stance on negotiations with the U.S., saying there are no ongoing trade talks, and adding that pronouncements of progress in negotiation are groundless. Beijing has repeated a demand for the U.S. to drop unilateral tariffs and make sincere attempts at negotiating an outcome.

Looking forward, China's Minister of Finance Lan Fo'an is scheduled to be in Washington DC for the IMF Spring meetings. If there is a meeting between him and U.S. officials, it could be a sign of some progress, if not, it's probably a sign that there’s no imminent off-ramp.

Barring near-term off-ramps, what are the ways the U.S.-China tensions are escalating beyond trade?

Many investors are focused on how the relationship can evolve and “what’s next?” amid escalating tensions. As negotiations drag out between the U.S. and China, there are some other ways that China may retaliate or hold leverage against the U.S., beyond tariffs.

• A key pillar of the “Phase One” trade deal between the U.S. and China from 2020 was increased purchases of U.S. agricultural products, the terms of which China was unable to fulfil. This could be a sticking point, as China could instead source its imports from Brazil (another key producer) or other exporters. Indeed, reports are already pointing to reduced Chinese purchases of U.S. agricultural and energy commodities.

• China is home to some of the world’s largest deposits of rare earths and largely dominates the processing capacity for those minerals, which are critical as inputs for many high-tech supply chains. It has initiated outright bans on U.S. firms purchasing China-produced rare earths and imposed licenses on exports of some rare earths. It also has the potential to further tighten exports.

• Beijing has announced investigations into U.S. firms and placed other U.S. companies on its “entity list”, which effectively bans these companies from purchasing in China. While not large, around 7% of S&P 500 revenues are derived from Mainland China, and some companies and sectors are much more exposed than others. A ramp up of investigations could hurt some U.S. corporates significantly.

The U.S. has also implemented sector-specific export restrictions, particularly in semiconductors, in a bid to limit China’s advancements in strategic high-tech sectors and prevent military use. Recently, U.S. authorities implemented a license requirement for Nvidia to sell its H20 chip in China, a product which was explicitly designed to comply with previous U.S. curbs, which prompted the company to warn about a $5.5bn write down. More companies may come under pressure if they have substantial China exposure, or otherwise they’ll have to make costly adjustments to operations in order to comply with U.S. regulations, only for those to be potentially changed again.

With potentially more “special focus-type” tariffs aimed at strategic sectors on the way, such as for pharmaceuticals and semiconductors, China may be impacted in any escalation in sectoral restrictions by the U.S. from a national security perspective.

Investment implications

As uncertainty persists around tariff negotiations and their macro impacts, markets remain volatile amidst fast-moving headlines – meaning portfolio resilience and diversification are key. We are focused on core fixed income to hedge growth risks; equity structures to monetize volatility; gold, infrastructure and hedge funds to reduce portfolio volatility; and global diversification (across asset classes, especially FX).