America is no longer first for Treasury investors. The biggest foreign creditors of the U.S. federal government are becoming increasingly wary about President Trump’s policies, according to Bloomberg. Foreign investors currently hold $5.94 trillion, or 42.7% of the $13.9 trillion of U.S. Treasury debt currently outstanding. However, in 2016 major foreign holders reduced their holdings of U.S. Treasury Bonds by $201.9 billion, Bloomberg notes. Trump’s plans to boost infrastructure spending and cut taxes may be jeopardized if foreign investors cut their funding support.

Concerns About Trump

The main concerns facing all fixed income investors, whether domestic or foreign, is that the Trump administration will usher in a period of bigger federal budget deficits that will spark higher inflation and spur the Federal Reserve to push interest rates further upward. Higher inflation would erode the value of interest and principal payments. Already, the increase in interest rates since November depressed the prices of bond holdings.

Add in concerns about Trump’s foreign policy, and foreign fixed income investors have yet more reasons to stay on the sidelines, Bloomberg observes. In particular, Trump has taken aim at the largest foreign creditors of the U.S. government, Japan and China, accusing them of currency manipulation to cheapen their exports. (For more, see also: How the Two Faces of Trump are Shaking the Markets.)

Who’s Selling

Japanese investors reduced their holdings of U.S. Treasuries in December by $21.3 billion, according to Japanese Ministry of Finance data cited by Bloomberg. This was the biggest monthly net sales figure since May 2013, the Financial Times reports. Still, Japanese investors remain the largest overseas creditors of the U.S. government, holding about $1.1 trillion of Treasuries. Nonetheless, including a smaller round of net selling in November, this marks the first time since 2014 that Japanese investors have been net sellers of U.S. Treasuries for two straight months, Bloomberg says.

China holds about $1 trillion of U.S. Treasuries and has been a net seller since May. Their holdings are now at the lowest level in seven years, Bloomberg reports. Overall, the share of U.S. Treasury debt owned by foreigners has dipped from about 56% in 2008 to its current 42.7%, according to Bloomberg's February 12 story. Investors in the U.S. have taken up the slack so far.

Recent Losses Spur Caution

Both Japanese and European investors in U.S. Treasuries suffered big losses in the fourth quarter of 2016, despite hedging against fluctuations in the value of the U.S. dollar, according to analysis by Bank of America Corp. (BAC) cited by Bloomberg. For Japanese investors, the loss was 4.7%, the largest in three decades. Significantly higher hedging costs, along with the fall in the price of U.S. Treasuries as interest rates rose, spurred the losses, CNBC reported in December.

These factors more than offset the impact of a rising dollar, which increased the value of U.S. Treasuries when converted into Japanese yen. The yen to dollar exchange rate fell from 101.35 on September 30 to 116.96 on December 30, a move of 15.4%, according to Bloomberg Markets data. All else equal, this should have increased returns in terms of yen by the same 15.4%.

Nonetheless, the 10-year U.S. Treasury Note currently holds a decisive yield advantage over Japanese Government Bonds (JGBs), Bloomberg observes. After hedging against currency price shifts, the U.S. T-Note yields 0.89%, nearly ten times greater than the 0.09% yield on JGBs.