China’s gradual exit from US government debt has evolved from a quiet background trend to a clear risk management signal, and Bitcoin traders are watching the market to see if the next domino will occur.
The immediate trigger for this new concern was on February 9, when Bloomberg reported that Chinese regulators were asking commercial banks to limit their exposure to U.S. Treasuries due to concentration risk and volatility.
The guidelines immediately drew attention to the vast amount of U.S. debt held by Chinese institutions. Chinese financial firms held about $298 billion in dollar-denominated bonds as of September, according to data from the State Administration of Foreign Exchange.
But the key unknown, and the source of market turmoil, is exactly how much of that number is allocated to Treasuries versus other dollar-denominated debt.
However, this regulatory pressure on commercial lenders is not occurring in a vacuum. This further exacerbates a year-long strategic withdrawal from U.S. debt already evident in Beijing’s official reports.
Mainland China’s official Treasury holdings fell to $682.6 billion in November 2025, the lowest level in a decade, according to the U.S. Treasury’s “Major Foreign Holders” data.
This trend has continued to accelerate over the past five years as China aggressively reduces its dependence on US financial markets.
Basically, the overall situation is grim. Bidding from the East is drying up in both commercial and national channels.
The threat to Bitcoin is not that China will single-handedly “destroy” the U.S. Treasury market. The US market is too deep for that. China’s marketable debt is $28.86 trillion, but $682.6 billion is only 2.4% of its equity.
But the real danger is more subtle. If foreign participation declines and U.S. yields rise through term premiums, the very financial conditions on which volatile assets like cryptocurrencies depend will become strained.
The “Regular Premium” channel is interesting
On the day this news broke, the yield on the US 10-year Treasury note was hovering around 4.23%. This level is not inherently a crisis, but the risk lies in how it rises.
While orderly repricing is manageable, chaotic spikes caused by buyer strikes can cause rapid deleveraging across interest rates, stocks, and cryptocurrencies.
The Federal Reserve Bank of Kansas City’s 2025 Economic Bulletin provides a sobering assessment of this scenario. They estimate that one standard deviation of liquidation among foreign investors could raise U.S. Treasury yields by 25 to 100 basis points.
Importantly, the paper notes that a reduction in the appetite for new issuance is enough to put upward pressure on interest rates, so yields could rise even without a dramatic selloff.
Additionally, more extreme tail risk benchmarks are based on the 2022 NBER Working Paper on Stress Episodes. The study estimates that “identified” sales of $100 billion by foreign officials could impact 10-year Treasury yields, with subsequent shocks of more than 100 basis points.
Although this is not a baseline forecast, it serves as a reminder that positioning dominates fundamentals during liquidity shocks.
Why Bitcoin is attracting attention: Real yield and financial situation
Bitcoin has traded like a macroduration asset for most of the post-2020 cycle.
In this regime, rising yields and tight liquidity often lead to lower bid prices for speculative assets, even if the catalyst starts with interest rates rather than cryptocurrencies.
Therefore, the real yield factor is important here. The U.S. 10-year inflation-adjusted (TIPS) yield was around 1.89% as of February 5, increasing the opportunity cost of holding non-yielding assets.
But the trap for the bears is that broader financial conditions do not yet scream “crisis.” The Chicago Fed’s National Financial Conditions Index was -0.56 for the week ending January 30, indicating conditions remain weaker than average.
This nuance is dangerous. Markets can tighten significantly from moderate levels without falling into systemic stress.
Unfortunately for crypto bulls, that interim tightening is often enough to send Bitcoin lower without triggering a Fed bailout.
In particular, Bitcoin’s recent price movements confirm this sensitivity. Last week, the flagship digital asset briefly dipped below $60,000 amid widespread risk-off activity, but recovered to above $70,000 as the market stabilized.
By February 9th, Bitcoin had rebounded again, proving that Bitcoin remains a high-beta indicator of global liquidity sentiment.
China – Yield – 4 Scenarios for Traders to Monitor BTC Feedback Loops
To understand what happens next, traders are looking not only at whether China sells, but also how the market absorbs those sales. The impact on Bitcoin will depend entirely on the speed of its movement and the resulting stress on dollar liquidity.
Here are four key ways this dynamic is likely to play out in the coming months.
- “Contained risk avoidance” (base case):
In this case, banks would slow their additional purchases and China’s headline holdings would decline primarily through maturities and reallocations rather than emergency sales.
As a result, U.S. yields will rise by 10 to 30 basis points over time, primarily due to term premiums and the market’s need to absorb supply.
Bitcoin faces mild headwinds here, but the main drivers remain US macro data and changing expectations for the Federal Reserve.
- “Repricing of term premium” (macro bearish regime):
If the market interprets China’s guidance as a long-term change in foreign investment appetite, yields could move back into the Kansas City Fed’s 25-100 basis point range.
Such a move, especially if real yields lead, would likely tighten financial conditions enough to compress risk exposure, pushing down crypto prices through higher funding costs, lower liquidity, and risk-parity-style deleveraging.
- “Disorganized liquidity shock” (tail risk):
A rapid, politicized, or crowded exit, even if not China-led, could cause significant price effects.
The stress episode framework, which links $100 billion in foreign government sales to an impact of 100 basis points or more, is the kind of reference that traders cite when considering nonlinear outcomes.
In this scenario, Bitcoin could first plummet due to a forced selloff, and then rebound if policymakers introduced liquidity tools.
- “A Twist on Stablecoins” (underrated):
Ironically, while China is retreating, cryptocurrencies themselves are strengthening.
DeFiLlama estimates the stablecoin’s market capitalization at around $307 billion, and Tether has a reported $141 billion exposure to U.S. Treasuries and related debt, which is about one-fifth of its Chinese position.
In fact, the company recently revealed that it was among the top 10 buyers of U.S. Treasuries over the past year.
If stablecoin supply remains resilient, crypto capital could essentially help sustain itself by supporting demand for paper money, but Bitcoin could still suffer if broader conditions tighten.
Policy backstop factor: when high yields become BTC positive again
The ultimate centerpiece of the “yields rising, Bitcoin falling” correlation is market function.
If soaring yields become so disorganized as to threaten the U.S. bond market itself, the U.S. has the tools at the ready. The IMF working paper on Treasury buybacks argues that such operations can effectively restore order to stressed sectors.
This is the reflexivity that crypto traders rely on. In severe bond market events, a short-term Bitcoin crash often heralds a liquidity-driven rebound once the backstop arrives.
For now, China’s $682.6 billion headline figure is more of a barometer of vulnerability than a “sell signal.”
This is a reminder that demand for government bonds is becoming more sensitive to prices on the margin, and that Bitcoin remains the most accurate real-time measure of whether the market sees a rise in yields as a simple price increase or the beginning of a tighter and more risky regime.
(Tag translation) Bitcoin
