Written by: Andjela Radmilac
Compiled by: Saoirse, Foresight News
In June, foreign investors collectively poured a net $133.5 billion into US financial markets, but simultaneously sold off $29 billion in short-term Treasury bills.
The two sets of data reflect two distinctly different capital flows within the same month: most of the inflow went into the US stock market, but demand for US government debt weakened significantly. Foreign buyers purchased $181.4 billion worth of US stocks but only bought $6.8 billion in long-term Treasury bonds; on the short-term bond side, they reduced their holdings of short-term Treasury bills, often used as cash reservoirs.
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 the token's value into short-term Treasury bills and similar assets. If overseas buyers continue to reduce their Treasury holdings, the rapidly growing stablecoin sector could become another significant source of demand, potentially comparable in scale to foreign capital. June's data shows the industry already has sufficient size, but recent token issuance has been minimal and cannot explain this $29 billion sell-off.
Foreign Investors Favor Stocks Over Cash-Like Debt
The US Treasury International Capital (TIC) report is a monthly document tracking capital flows between the US and the rest of the world. It records both securities transactions and short-term bank flows, so the headline total often masks underlying, vastly different investment decisions.
Summary of June overseas investor activity:
The $181.4 billion figure for stock investment is higher than the total inflow of $133.5 billion because the total is a net result after offsetting numerous inflows and outflows. The sell-off of Treasury bills and the outflow of $34.4 billion under bank balance sheet items offset some of the stock purchases; meanwhile, US residents also exported capital overseas by purchasing foreign securities.
Although the statistical logic is complex, the core message is clear: foreign investors continue to allocate to US assets, especially US corporate equity; but their appetite for government debt is weak, and they are withdrawing funds from short-term debt instruments.
Treasury bills are US government debt securities maturing in one year or less. Due to their quick principal repayment and high market liquidity, they are often seen as a close substitute for cash, favored by central banks, corporations, money market funds, and stablecoin issuers for allocation.
US short-term Treasury holdings by overseas institutions dropped from about $1.43 trillion in May to $1.40 trillion in June. The June reduction amounted to roughly 2% of the May holdings. This marks the second consecutive month of reduction: foreign investors sold $43.5 billion in May and $29 billion in June, totaling approximately $72.5 billion over two months.
Existing data cannot directly determine the reason behind the sell-off. It could be routine cash management or a shift in asset allocation to other categories. The aggregate data shows a differentiated approach by foreign capital towards the US market: buying stocks, reducing Treasury bill holdings, but still maintaining a net inflow of funds overall. Caution is also needed when interpreting the Treasury's country-by-country data table, as securities are recorded through custodian institutions, which can obscure the actual owner's country.
How Stablecoins Convert Dollar Demand 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 is obligated to redeem the token for $1, so it invests the reserve funds in assets that can be quickly liquidated. Short-term Treasury bills fit this need perfectly; few other assets can be converted to cash as efficiently.
Once the issuer purchases Treasury bills, the user's demand for digital dollars is indirectly transformed into demand for US government debt. Users don't need a securities account or access to the TreasuryDirect platform; the investment of reserve assets is handled entirely by the stablecoin company in the background.
The "Clarity for Payment Stablecoins Act" (often referenced as the "GENIUS Act" or similar proposals) formalizes this operational model, requiring regulated payment stablecoins to hold highly liquid reserves. Proposed rules released by the US Treasury on August 17th further refine the federal regulatory framework, listing cash, short-term US Treasuries, and related repurchase agreements as priority-approved reserve assets.
CryptoSlate previously analyzed that such legislation would provide a federal regulatory path for dollar tokens while delegating the design of reserve asset composition and access details to regulators.
Tether's scale exemplifies the size of major issuers. Its Q2 attestation report shows direct holdings of short-term Treasury bills worth $114.96 billion, plus an additional $25.62 billion in overnight and term reverse repurchase agreement 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; the TIC report data cannot prove that the bonds sold by foreign institutions were directly purchased by Tether or other issuers.
Circle, the issuer of USDC, also employs a similar reserve model. According to its reserve disclosure, the vast majority of USDC reserves are held in the Circle Reserve Fund, managed by BlackRock. This is a government money market fund that can allocate to cash, short-term Treasury bills, and overnight US Treasury repurchase products.
Although Tether and Circle have different reserve structures, both convert market demand for digital dollars into demand for US cash-like assets.
Stablecoins as the Potential Buyer the US Government Hopes For
It's easy to understand why the US government places high hopes on stablecoins. Overseas users can hold and transfer dollar stablecoins without personally buying Treasuries; meanwhile, stablecoin issuers invest reserve funds into Treasury bills or the repo market. Dollars can circulate into the hands of overseas users, and the resulting demand from reserves flows back into the US financial system.
However, this mechanism only generates new Treasury demand when the circulating supply of stablecoins expands, or when issuers reallocate reserves by replacing other assets. At the end of Q2, Tether's USDT circulation was $184.6 billion, an increase of only about $446 million from the end of Q1. DeFiLlama data shows that as of August 21, the total stablecoin market size was approximately $302.1 billion, down slightly by 0.14% over thirty days.
This data refutes a simple deduction: new token issuance did not absorb the $29 billion Treasury bill selling pressure; issuers merely made internal adjustments to existing reserves. Public data also provides no evidence that overseas holders directly sold bonds to stablecoin firms.
This mechanism also carries a reverse risk: when a large number of users redeem stablecoins, issuers must pay out cash, potentially leading to sales of Treasury bills or allowing bonds to mature. Stablecoins can become important buyers of US debt, but they themselves experience cycles of buying and selling.
The next TIC report, covering July data, will be released on September 16th. Two key metrics to watch: overseas holdings of short-term Treasury bills, and total stablecoin circulation. If overseas institutions reduce holdings for a third consecutive month while stablecoin supply remains stable, the demand gap for Treasuries will persist. If stablecoin circulation rises and issuers' disclosed Treasury holdings expand correspondingly, it would indicate this new class of buyers is increasing its participation. Due to the custody-based recording model, it's difficult to precisely match the two datasets.
In summary, foreign investors continued to allocate to US assets in June, but capital flooded into the stock market while reducing holdings of short-term government cash-like bonds. Stablecoin issuers, with holdings of hundreds of billions in US Treasuries, are already an undeniable force on the demand side for US debt. Tether's minimal Q2 growth was completely insufficient to explain June's large-scale sell-off.
In the arena of short-term US Treasuries where foreign demand is weakening, the US is building a regulatory framework for a new class of potentially massive buyers. The connection forged between the digital dollar and US government financing is precisely the core reason this $29 billion Treasury bill sell-off warrants attention.
