As the Iran war upends decades of balance sheets, central banks around the world are making a desperate move, dumping U.S. Treasuries at a pace not seen since 2012.
Spiking energy prices and suffocating pressure on national currencies are forcing the world’s major economies to liquidate their reserves to avoid a total collapse. It’s a historic shift that threatens the dollar’s global position as a reserve currency and is sending shockwaves from the U.S. to Turkey.
US Treasuries Are Being Dumped
More specifically, foreign central banks have sharply reduced their holdings of US Treasury bonds held at the New York Federal Reserve, to the lowest level since 2012, as countries sell US debt to prop up their economies and currencies after the war with Iran. The value of US Treasury bonds held at the New York Fed by official entities – a category that includes mainly central banks but also governments and international organizations – has fallen by $82 billion since February 25, to $2.7 trillion, according to Fed data.
At the same time, several central banks have intervened in foreign exchange markets to support their currencies, which usually involves selling dollars.
Oil-importing countries such as Turkey, India and Thailand are likely to be among those selling, as they pay higher prices for oil priced in dollars.
Turkey’s central bank has sold $22 billion in foreign government bonds from its foreign exchange reserves since February 27, the day before the attacks on Iran began, according to official data. A significant portion of these were US Treasury bonds.
Separate data from the central banks of Thailand and India show that foreign exchange reserves have been sold since the start of the Iran war, although it is not clear whether these are sales of US government bonds or dollar deposits.
Many countries do not want their currencies to weaken further, because that increases the price of oil in local currency — which means either more fiscal subsidies or a greater burden on households. That is why we are seeing a widespread decision to intervene in foreign exchange markets to limit depreciation and the rise in the price of oil in local currency.
Pressures on the US bond market
US Treasuries are a key reserve asset for central banks worldwide, as their market, worth $30 trillion, is the largest and most liquid in the world.
Foreign central banks are selling US bonds at a time when the bond market is already under pressure, as investors worry that the conflict in the Middle East could fuel inflation. That has pushed yields on two-year and 10-year Treasurys higher this month at their fastest pace since 2024, pushing up borrowing costs for governments, businesses and households.
Some investors noted that foreign central banks’ holdings of U.S. Treasuries often decline when the dollar strengthens as they seek to restructure their portfolios and support their currencies, while others said the data may show holders are drawing down liquidity amid high volatility.
“War chests” are being tapped
The data suggests that official foreign holders may be “filling their war chests” by selling U.S. Treasuries, said Stephen Jones, chief investment officer at Aegon Asset Management. “They’re pulling money for hard times. Some Treasury bonds may have been transferred to custodians other than the New York Fed, rather than being sold outright. But the sales recorded in the Fed data remain significant, especially considering that the bond market has nearly tripled since 2012, when it last saw a similar level of sales, according to Swiber.
Moving away from the dollar
Official foreign holdings of Treasuries held at the Fed have declined in recent years as reserve managers diversify away from the dollar. That has made private foreign investors increasingly important to the market.
The recent sell-off is part of a larger trend in which reserve managers and official bodies are diversifying away from U.S. Treasuries.
