$82 billion fleeing! Over a month of US-Iran conflict, multiple countries dump US bonds aggressively

Jin 10 Data

After the outbreak of the Iran war, central banks in multiple countries massively sold U.S. Treasuries to pay for expensive oil and support their domestic currencies. The amount of U.S. Treasuries held in custody by the New York Fed has sharply fallen to $2.7 trillion, the lowest level since 2012.

After the outbreak of the Iran war, multiple countries, to support their own economies and currencies, have sold U.S. Treasury bonds in succession, and foreign central banks’ holdings of U.S. Treasuries with the New York Fed have already fallen to the lowest level since 2012.

According to Federal Reserve data, since February 25, the size of U.S. Treasuries held in custody at the New York Fed by official institutions in various countries (mainly central banks, also including governments and international institutions) has decreased by $82 billion, to $2.7 trillion.

The decline in foreign central banks’ holdings of U.S. Treasuries held in custody by the New York Fed

The sell-off trend over the month since the war began highlights this: Iran’s blockade of the Strait of Hormuz triggered a surge in energy prices, severely hitting the finances of oil-importing countries, while the U.S. dollar strengthened across the board.

At the same time, central banks in multiple countries have stepped into currency-market interventions to provide support. This operation typically requires selling dollars.

Meghan Swiber, an interest-rate strategist at Bank of America, said: “Foreign official departments are selling U.S. Treasuries.”

Brad Setser, a senior fellow at the Council on Foreign Relations, has long studied foreign holdings of U.S. Treasuries. He pointed out that oil-importing countries such as Turkey, India, and Thailand, to pay for expensive oil priced in U.S. dollars, are likely the main sellers.

According to official data, starting from the day before the February 27 U.S.-Israel attack on Iran, Turkey’s central bank had sold $22 billion worth of foreign government bonds from its foreign-exchange reserves. Setser said that a significant portion of that could be U.S. Treasuries.

The decline in Turkey’s holdings of foreign government bonds

Separate data from the central banks of Thailand and India also show that since the outbreak of the war, foreign-exchange reserves have continued to be drained, but it is still unclear whether this is due to selling U.S. Treasuries or selling dollar deposits.

Setser said: “Many countries are unwilling to let their currencies depreciate further, because that would raise oil prices priced in their currencies—either by increasing fiscal subsidy pressures or by adding burdens on the public. Therefore, countries generally choose currency-market interventions to limit depreciation and imported oil-price increases.”

Swiber of Bank of America added that Middle East oil-exporting countries may also reduce their holdings of U.S. Treasuries to make up for oil income, but they account for a small share among total U.S. Treasury holders.

U.S. Treasuries are a core reserve asset for central banks worldwide. Because the market has a size of $300 trillion, it is the largest and deepest bond market globally.

At the time foreign central banks are concentrating sell-offs, the U.S. Treasury market is already under pressure—because traders are worried that the conflict in the Middle East will stoke inflation. This month, yields on two-year and ten-year U.S. Treasuries have recorded the largest increases since 2024, pushing up financing costs for the U.S. government, corporations, and households.

U.S. financing costs surge during the conflict

Some investors believe that when the U.S. dollar strengthens, central banks’ reduction of U.S. Treasuries is normal—meant for asset rebalancing and providing support. Others argue that this is a signal that holders are urgently using reserve funds amid market volatility.

Stephen Jones, chief investment officer at Aegon Asset Management, said: “The data suggest that foreign official holders may be selling U.S. Treasuries to raise cash and replenish emergency funds. ‘They are pulling back emergency funds.’”

Analysts also noted that some U.S. Treasury holdings may simply have been transferred to custodians other than the New York Fed, rather than being fully sold off. But Swiber said that the scale of sell-offs recorded in Federal Reserve data remains very conspicuous—especially considering that since 2012, the size of the U.S. Treasury market has expanded by roughly three times.

In recent years, as reserve-management institutions have pushed de-dollarization and asset diversification, foreign official holdings of U.S. Treasuries with the Fed have continued to decline, and foreign private investors have become increasingly important participants in the market.

Swiber said that the recent sell-off “reflects a bigger trend: reserve-management institutions and official accounts are continuing to reduce holdings of U.S. Treasuries and advance diversification.”

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Responsible editor: Guo Jian