As markets sold off, analysts scrambled to explain the moves. One popular narrative that emerged as U.S. stocks sold off while Treasury yields rose and the dollar weakened: capital is fleeing the United States! We’re told that doubts about the primacy of the dollar took center stage in discussions in D.C. among participants at the World Bank and IMF meetings.²

However, while the capital flight story is one possible explanation, the story is far from definitive. Here’s why:
 

Unfortunately, monthly data on foreign holdings held by non-official entities are only available as of February 2025. Nonetheless, total foreign holdings of Treasuries continued to increase through February (see Figure 3).

Further, if you zoom out, 2-year Treasury yields ended April 2025 lower than where they were before the “Liberation Day” announcement, reflecting that shorter-dated Treasuries remain a “safe-haven” for investors (see Figure 4). Ten-year Treasury yields exhibited a bigger spike but also ended April five basis points lower than where they started.

Second, it’s most likely not China dumping Treasuries that rattled the U.S. Treasury market. China has been reducing its Treasury holdings since 2013. The recent pace of selling has slowed compared to the 2021 to 2023 period (see Figure 5). Further, long-term yields were seemingly unaffected when China “dumped” $190 billion of Treasuries from July to November 2016 (yields later rose due to Trump’s election).

Interestingly, while China’s Treasury holdings are declining slowly, China holds a lot of other U.S. securities, including U.S. equities (see Figure 6)! Despite the run-off in Treasuries, China’s equity holdings have increased by $68 billion since January 2024.

Third, over a longer run perspective, there are few liquid and safe alternatives to U.S. Treasuries. The U.S. Treasury market is significantly larger than other markets, as its size is nearly double that of the euro area governments’ combined debt outstanding.³ Further, the Treasury market remains the most liquid market globally. For example, the average daily trading volume in Treasuries reached over $1 trillion in the first quarter of 2025.⁴ 

Meanwhile, the total size (stock) of the German government debt market is $2.6 trillion.⁵ Yes, incremental debt issuance under the new budget bill may add $100 billion a year, but the annual growth in Treasury market trading volume averages $100 billion over the last five years. In other words, more Treasuries trade every three days than the total outstanding German government bond market (see Figure 7). Consequently, for reserve managers seeking safety and liquidity, there are no alternatives to Treasuries.

Fourth, non-Treasury U.S. securities make up the bulk U.S. assets held by foreigners (see Figure 8). Even if foreign investors were concerned about Treasuries, it still would not mean a flight from U.S. assets. In early 2025, foreign investors added to corporate bonds and stocks. 

Fifth, capital inflows to the U.S. are not limited to buying public securities. When foreign firms invest in the U.S.—moving to the U.S., acquiring U.S. companies, building factories in the U.S., etc—it all counts as inflows in foreign direct investment (FDI). In fact, the U.S. has remained the most attractive destination for FDI in ten of the last 15 years (see Figure 9). In 2023, FDI inflows reached an estimated $5.5 trillion. In other words, on top of the $3.7 trillion increase in U.S. public securities holdings, another $1.8 trillion is invested in the private sector, fueling real productivity growth.⁶

Ok, if not capital flight, is there a plausible other explanation for the recent mix of market movements? 

Yes, we discussed that some of the sharp rise in longer-term yields was due to leveraged holders (hedge funds) selling longer-dated Treasuries, which pushed up yields. 

Further, changes in macro factors in April also created yield volatility. First, market growth expectations deteriorated as trade policy uncertainty rose (see Figure 10, left-hand panel).

Second, news that the U.S. budget deficit is likely to be larger than previously expected may have contributed to a higher term premium (see Figure 10, right-hand panel). As we’ve discussed, the Trump administration’s efforts to raise revenue through tariffs and cut federal spending will probably fall short of the revenue lost from their planned tax cut extension. As the chances of “fiscal austerity” fade, investors may demand a higher term premium, creating a “steeper” yield curve than otherwise would be the case.

Diminished growth forecasts and falling terminal fed funds rate expectations also explain the dollar weakness in April. We’ve noticed an interesting pattern: when the Fed is viewed as more hawkish, the dollar tends to strengthen, and when the Fed is expected to ease, the opposite occurs. Since January, expectations for rate cuts went from one to four, and perhaps more importantly, the market’s implied terminal fed funds rate dropped by 100 basis points. Seen in this light, a somewhat weaker USD makes sense (see Figure 11).

The bottom line is that capital flight is one possible explanation for recent puzzling market moves. However, capital flight is not the only explanation, and the case for it is far from definitive. 

Be skeptical of the (capital) fright, 

The Payden Economics Team

1.  Another version of the quote is that “narrative follows price,” meaning investors make-up narratives to explain market moves. 

2.  Bessent seeks to reassure global leaders on dollar’s role as safe haven. The New York Times. (2025, April 26). https://www.nytimes.com/2025/04/26/business/dollar-trump-bessent.html 

3.  The Treasury market’s size ($27 trillion) compared to broker-dealer balance sheets may create periodic bouts of volatility. 

4.  U.S. Treasury Statistics. SIFMA. 

5.  Debt Securities Statistics, Summary of Debt Statistics Outstanding. Bank for International Settlements.

6.  Leino, T., & Gavrilovic, M. (2025, February 20). Foreign direct investment increased to a record $41 trillion. International Monetary Fund. https://www.imf.org/en/Blogs/Articles/2025/02/20/foreign-direct-investment-increased-to-a-record-41-trillion?utm_source=beehiiv&utm_medium=email&utm_campaign=newsletter-the-dc-brief