Foreign central banks are selling off U.S. Treasury bonds.

How AI · How Soaring Energy Prices Trigger a Global Sell-off of U.S. Treasuries?

Reference News Network, April 4 According to a report on the Financial Times website on March 31, after the outbreak of the Iran war, countries around the world sold off U.S. Treasuries to support their own economies and currencies. The amount of U.S. Treasuries held by foreign central banks at the New York Federal Reserve has fallen to its lowest level since 2012.

Data from the Federal Reserve shows that since February 25, the total of U.S. Treasuries held by central banks, governments, and international institutions managed by the New York Fed has decreased by $82 billion, down to $27 trillion.

Since the war broke out over a month ago, these holdings have continued to decline, highlighting how the energy price surge triggered by Iran closing the key Strait of Hormuz has disrupted the fiscal conditions of oil-importing countries and driven the dollar higher across the board.

This also coincides with some central banks intervening in the foreign exchange market to support their currencies, which often involves selling dollars.

Megan Swiber, a U.S. interest rate strategist at Bank of America, said, “Foreign official sectors are selling U.S. Treasuries.”

Brad Setser, a senior fellow at the Council on Foreign Relations who studies foreign holdings of U.S. Treasuries, said that as oil prices denominated in dollars rise, oil-importing countries like Turkey, India, and Thailand are likely selling U.S. Treasuries to pay higher oil bills.

Official data shows that since February 27 (the day before the U.S.-Israel attack on Iran), the Turkish central bank has sold $22 billion worth of foreign government securities from its foreign exchange reserves. Setser said that a significant portion of this is likely U.S. Treasuries.

Another set of data from the central banks of Thailand and India indicates that since the outbreak of the Iran war, both countries have sold some foreign exchange reserves, but it is unclear whether this reflects selling U.S. Treasuries or just dollar deposits.

Setser said, “Many countries… do not want their currencies to weaken further because that would push up oil prices denominated in their currencies. This means either increasing fiscal subsidies or facing hardship for households. Therefore, most countries are intervening in the forex market to try to limit currency depreciation and rising oil prices in their local currencies.”

Swiber pointed out that Middle Eastern oil-exporting countries might also be selling these assets to compensate for lost oil revenues, but they account for only a small part of overall U.S. Treasury holdings.

U.S. Treasuries have always been considered the most important reserve asset by central banks worldwide because this securities market, valued at $30 trillion, is the largest and most liquid in the world.

As foreign central banks sell off, the U.S. Treasury market was already under pressure, as traders worried that Middle Eastern conflicts could push up inflation. This led to the biggest increases in yields for 2-year and 10-year U.S. Treasuries in 2024 through March, raising borrowing costs for governments, businesses, and households.

Some investors say that as the dollar strengthens, foreign central banks tend to hold fewer U.S. Treasuries because they are trying to rebalance their asset allocations and defend their currencies.

Stephen Jones, Chief Investment Officer at Dutch Global Life Insurance Asset Management, stated that these data suggest that foreign official holders might be cashing out U.S. Treasuries to build emergency funds. (Compiled by Xu Yanhong)