China Banks to Pare U.S. Treasuries? ETFs to Play

U.S. Treasuries are at risks of incurring losses in the near term after reports that Chinese regulators advised domestic financial institutions to curb their holdings of U.S. government bonds amid concerns about market volatility, per Bloomberg, as quoted on Yahoo Finance. The move is seen as part of broader efforts to manage risk and diversify exposure.

Chinese Guidance Targets Financial Institutions, Not State Holdings

Officials reportedly encouraged banks with significant exposure to U.S. debt to limit new purchases and gradually reduce positions. However, no specific targets or timelines were provided, and the guidance does not apply to China’s official state-held Treasury reserves.

The shift reflects the broader trend in which countries like India and Brazil are trimming their exposure to U.S. bonds amid growing concerns about the attractiveness of U.S. assets. Official U.S. data show China-based investors’ Treasury holdings have fallen to $682.6 billion — the lowest since 2008 — down from a peak of $1.32 trillion in 2013, as quoted on the above-mentioned source.

Downgrade of U.S. Debt

Note that Moody's downgraded the U.S. sovereign credit rating by one notch in May 2025, citing concerns over the country’s ballooning $38.6 trillion debt burden. This move, following similar actions by Fitch in 2023 and S&P in 2011, raised alarm among investors about the nation's long-term fiscal sustainability.

Rising 10-year Treasury term premiums suggest that markets are pricing in greater long-term fiscal risk. Note that the Term Premium on a 10 Year Zero Coupon Bond rose from negative 0.4090 in Feb. 2021 to 0.6148 in Jan. 2026.

Suggested ETF Investment Strategies

Given this volatile fiscal backdrop and market response, here are a few exchange-traded fund (ETF) strategies for investors:

Defensive Fixed Income Exposure

Short-Term Treasuries: Limit duration risk amid rising yields. Moreover, Vanguard Short-Term Treasury ETF VGSH yields as high as 3.96% annually and charges 3 bps in fees.

Diversification with Investment-Grade Corporate Bonds

Investment Grade Corporate Bonds: Potentially safer than Treasuries as yields rise. iShares iBoxx $ Investment Grade Corporate Bond ETF LQD yields 4.48% annually and charges 14 bps in fees.

International and Global Diversification

Global Bond ETFs: Reduce U.S. exposure by incorporating non-dollar-denominated bonds. Vanguard Total International Bond ETF BNDX yields 4.39% annually.

Emerging Market Bonds: Emerging market bonds are higher-yielding, but come with higher risk. iShares J.P. Morgan USD Emerging Markets Bond ETF EMB yields 4.93% annually.

Tactical Plays on Rising Yields

Inverse Bond ETFs: Profit from rising long-term yields by investing in inverse ETFs like ProShares UltraShort 20+ Year Treasury TBT.

Floating Rate Bond ETFs: Adjust coupon payments with interest rates, reducing duration risk. iShares Floating Rate Bond ETF FLOT yields 4.78% annually.

Equity Market Protection

Dividend-Paying Equity ETFs: Stability and income during bond market volatility. Seek exposure to dividend-focused ETFs VYM and SCHD.

Low Volatility Equity ETFs: Cushion against equity market swings linked to fiscal instability. Try ETFs like SPLV and USMV.

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This article originally published on Zacks Investment Research (zacks.com).

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