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UPDATE 1-Foreigners sell US Treasuries in May; China's holdings drop to 13-year low -data

(Adds details on Japan and China holdings, data on other US asset classes, analyst comment, byline)

By Gertrude Chavez-Dreyfuss

NEW YORK, July 18 (Reuters) - Foreign holdings of U.S. Treasuries fell in May, data from the Treasury Department showed on Tuesday, led by sell-offs from China and Japan as interest rates in the world's largest economy continued to rise.

Holdings of U.S. Treasuries dropped to $7.527 trillion in May, down from $7.581 trillion in the previous month, declining for the first time in four months. But compared with a year earlier, Treasuries owned by foreigners were up 1.6%.

"What stands out is the big selling by Japan and China. They drove the selling by foreign investors during the month, which overall made sense given the move higher in rates toward the second half of the month," said Gennadiy Goldberg, head of U.S. rates strategy, at TD Securities in New York.

He also cited the outflows in custodial accounts -- typically the proxies for hedge funds -- such as the UK, Cayman Islands, and the Bahamas.

"All of those saw outflows as well, fairly consistent with rates moving higher during the month, and generally reflects the lack of interest from foreign investors in U.S. Treasuries," Goldberg said.

The benchmark 10-year Treasury yield started May at 3.574% , rising 12.2 basis points to 3.696% by the end of the month. U.S. 10-year yields rose as high as 3.859% in May, which at the time was nearly a three-month high.

Japan is still the largest non-U.S. holder of Treasuries with $1.097 trillion in May, down from $1.127 trillion in March. Japan had been selling Treasuries for most of last year to help boost a weak yen.

Data also showed holdings of China, the second-biggest non-U.S. holder of Treasuries, dropped as well to $846.7 billion, down from 868.9 billion the previous month. May's holdings were the lowest since May 2010 when China had $843.7 billion.

China's Treasury holdings have been on a downward trajectory since 2018.

"It's a continuation of a trend, maybe for intervention purposes, or maybe there's something geopolitical there," Goldberg said.

Major U.S. asset classes showed mixed flows during the month, data showed.

On a per transaction basis, foreign inflows into Treasuries slumped to $37.5 billion in May, down sharply from $92.2 billion in April.

U.S. equities, meanwhile, saw foreign outflows of $34.4 billion in May, compared with outflows of $15.3 billion the previous month.

The two bright spots were foreign buying in U.S. corporate bonds, which saw inflows of $45.4 billion, and agency debt, with foreign buying of $11.3 billion.

Data also showed U.S. residents increased their holdings of long-term foreign securities, with net purchases of $33.9 billion in May. (Reporting by Gertrude Chavez-Dreyfuss; Editing by Daniel Wallis)