Foreign investors sold $29 billion in short-term U.S. Treasuries — why is America betting on stablecoins to "take over"?

Original Author: Andjela Radmilac

Original Translation: Saoirse, Foresight News

In June, foreign investors recorded a net inflow of $133.5 billion into U.S. financial markets, but simultaneously sold off $29 billion in short-term Treasury bills.

These two data points reflect two distinct capital flows within the same month: the majority of the inflow was directed toward U.S. equities, while demand for U.S. government debt notably weakened. Foreign buyers purchased $181.4 billion in U.S. stocks but only acquired $6.8 billion in long-term Treasury bonds; on the short-term debt side, they reduced their holdings of Treasury bills, often used as cash reservoirs.

This divergence in capital flows also explains why stablecoins have been incorporated into the U.S. government's debt management strategy. Stablecoin issuers like Tether and Circle allocate a significant portion of their reserve assets backing the token value to short-term Treasury bills and similar instruments. If overseas buyers continue to reduce their Treasury bill holdings, the expanding stablecoin sector could emerge as another substantial demand force, with potential comparable to that of foreign capital. June data shows the industry has already reached sufficient scale, but recent token issuance growth has been minimal and insufficient to explain the $29 billion sell-off.

Foreign Investors Prefer Stocks Over Cash-Like Debt

The U.S. Treasury International Capital (TIC) report is a monthly record of fund flows between the United States and the rest of the world. The report tracks both securities transactions and short-term banking flows, meaning the headline totals often obscure vastly different underlying investment decisions.

A simplified overview of foreign investor activity in June:

The $181.4 billion figure for stock investments exceeds the overall $133.5 billion total inflow because the aggregate number reflects the net result of large offsetting inflows and outflows. Treasury bill sales, along with a $34.4 billion outflow under bank balance sheet items, offset part of the stock purchase inflows; concurrently, U.S. residents exported capital abroad by purchasing foreign securities.

Despite the complex statistical methodology, the core message is clear: foreign investors continue to allocate to U.S. assets, particularly favoring U.S. corporate equities; however, their appetite for government debt is weak, and they have withdrawn funds from short-term debt instruments.

Treasury bills are U.S. government debt instruments with maturities of one year or less. Due to rapid principal repayment and ample market liquidity, Treasury bills are often viewed as near-cash equivalents, favored by central banks, corporations, money market funds, and stablecoin issuers alike.

Foreign institutional holdings of U.S. short-term Treasuries fell to approximately $1.40 trillion in June, down from about $1.43 trillion in May. The June reduction represented roughly 2% of May's holdings. This marks the second consecutive month of divestment: foreign investors sold $43.5 billion in May and $29 billion in June, with cumulative reductions of approximately $72.5 billion over the two months.

Available data cannot definitively determine the motivations behind the sell-off, which could stem from routine cash management operations or portfolio reallocations to other asset classes. The combined data suggests foreign capital is taking a divergent approach to U.S. markets: buying stocks while trimming Treasury bill positions, yet maintaining an overall net inflow into the U.S. It is also important to exercise caution when interpreting the Treasury's country-by-country breakdown, as securities held through custodial arrangements can obscure the true nationality of the underlying owners.

How Stablecoins Convert Dollars into Treasury Bill Demand

A simple transaction illustrates the connection between stablecoins and Treasury bills: a user pays an issuer $1 and receives 1 dollar-pegged stablecoin. The issuer bears the obligation to redeem that stablecoin for $1 upon user request, prompting them to invest reserves in assets that can be quickly liquidated. Short-term Treasury bills fit this requirement perfectly—few other assets in the market can be converted to cash as efficiently and rapidly as Treasury bills.

Once issuers purchase Treasury bills, user demand for digital dollars is indirectly transformed into demand for U.S. government debt. Users need no securities account and no access to the Treasury's direct investment platform; all reserve asset investments are handled behind the scenes by stablecoin companies.

The GENIUS Act formally codified this operational framework, requiring regulated payment stablecoins to hold high-liquidity reserves. The proposed rules released by the U.S. Treasury on August 17 further refine the federal regulatory framework, designating cash, short-term U.S. Treasuries, and related repurchase agreements as priority-recognized reserve assets.

As CryptoSlate previously analyzed, this legislation opens a federal regulatory pathway for dollar-denominated tokens while delegating the detailed design and eligibility criteria for reserve assets to regulatory agencies.

Tether's scale alone demonstrates the magnitude of leading issuers. Its Q2 attestation report shows direct holdings of $114.96 billion in short-term Treasury bills, plus $25.62 billion in overnight and term repurchase positions. The $29 billion sell-off by foreign investors in June equates to roughly one-quarter of Tether's direct Treasury bill holdings.

This comparison serves only as a scale reference—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—a government money market fund that can allocate to cash, short-term Treasury bills, and overnight Treasury repurchase products.

While Tether and Circle differ in reserve architecture, both convert market demand for digital dollars into allocation demand for U.S. cash-equivalent assets.

Stablecoins Poised to Become the Buyer the U.S. Government Anticipates

It's easy to understand why the U.S. government holds high hopes for stablecoins. Overseas users can hold and transfer dollar-pegged stablecoins without needing to purchase U.S. Treasuries themselves; meanwhile, stablecoin issuers direct reserve capital into Treasury bills or the repo market. Dollars can circulate to users abroad, while the buy-side demand generated by reserves flows back into the U.S. financial system.

However, this mechanism only generates new Treasury demand when stablecoin circulation expands, or when issuers rebalance into other assets. Tether's USDT circulation stood at $184.6 billion at the end of Q2, increasing by only about $446 million compared to the end of Q1. According to DefiLlama data, as of August 21, the total stablecoin market size was approximately $302.1 billion, with a slight decline of 0.14% over thirty days.

These figures refute a simplistic assumption: new token issuance did not absorb the $29 billion Treasury bill sell pressure—issuers were merely reallocating existing reserves internally. Public data also provides no evidence that overseas holders directly transferred bonds to stablecoin companies.

This mechanism also carries the risk of operating in reverse: when large numbers of users redeem stablecoins, issuers must provide cash, potentially forcing them to sell Treasury bills or allow bonds to mature. Stablecoins can become significant buyers of U.S. debt, but they are also subject to cyclical periods of buying and selling.

The next TIC report, covering July data, will be released on September 16. Two key indicators to watch: foreign institutional holdings of short-term Treasury bills and total market stablecoin circulation. If overseas investors reduce holdings for a third consecutive month while stablecoin supply remains flat, the demand gap for U.S. debt will persist; if stablecoin circulation rises alongside expanding disclosed Treasury positions by issuers, it signals these new buyers are intensifying their market entry. Due to custodial record-keeping models, precise alignment between the two data sets is difficult to achieve.

In summary, foreign investors continued to allocate to U.S. assets in June, but capital flowed heavily into equities while reducing holdings of short-term government cash-equivalent debt. Stablecoin issuers, holding hundreds of billions in U.S. Treasury positions, are already an unignorable participant on the demand side. Tether's Q2 supply growth is entirely insufficient to explain June's large-scale sell-off.

In the short-term Treasury segment where overseas demand is weakening, the United States is building regulatory frameworks for a new class of buyers with enormous potential. The link being forged between digital dollars and U.S. government financing is precisely the core reason this $29 billion Treasury bill sell-off warrants attention.