The Iran war has triggered a surge in energy prices, prompting global central banks to sell U.S. Treasury holdings at the fastest pace in over a decade to stabilize their domestic economies and exchange rates.
Data from the Federal Reserve shows that the custodial holdings of U.S. Treasuries held by foreign official institutions at the Federal Reserve Bank of New York have plummeted by $82 billion since February 25th to $2.7 trillion, reaching the lowest level since 2012. Meanwhile, the increases in the yields of both U.S. two-year and ten-year Treasuries this month are the largest since 2024, indicating a broad rise in borrowing costs.
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&#34;Foreign official sectors are selling Treasuries,&#34; said Meghan Swiber, a U.S. rates strategist at Bank of America. The combination of shrinking foreign exchange reserves and selling Treasury holdings is exacerbating the already pressured U.S. debt market, further fueling investor concerns about inflation driven by the Middle East conflict.
This wave of selling also reflects a deeper trend: global reserve managers have been continuously diversifying their dollar asset allocation for years, and the status of U.S. debt as the world's primary reserve asset is facing increasingly evident erosion.
<h2>Oil-Importing Nations Bear the Brunt, Turkey Leads Sell-off</h2>
Following Iran's blockade of the Strait of Hormuz, global oil prices have soared, and oil-importing nations have suffered the most direct impact. The passive shrinkage of foreign exchange reserves, coupled with the need for currency market intervention, has prompted many central banks to accelerate the liquidation of their U.S. Treasury holdings.
Brad Setser, a senior fellow at the Council on Foreign Relations, noted that oil-importing nations such as Turkey, India, and Thailand are likely the primary participants in this selling wave, as these countries must pay higher oil prices in U.S. dollars. Official data shows that since February 27th—the day before Iran was attacked—Turkey's central bank had sold $22 billion in foreign government bonds from its foreign exchange reserves, a significant portion of which Setser believes was U.S. debt.
Independent data from the central banks of Thailand and India also indicate a decline in their foreign exchange reserves after the outbreak of hostilities, but it is currently unclear whether the decrease pertains to U.S. Treasury holdings or U.S. dollar deposits.
&#34;Many countries do not want their currencies to depreciate further, as this would drive up oil prices in local currency terms, meaning either more fiscal subsidies or greater hardship for residents. Therefore, countries have generally decided to intervene in the foreign exchange market to limit the depreciation of their currencies and the rise of oil prices in local currency terms,&#34; Setser said.
<h2>U.S. Debt Market Under Pressure, Yields See Largest Monthly Gain in Over a Year</h2>
The U.S. debt market is already facing multiple pressures, and the concentrated selling by foreign official institutions is further complicating the situation.
The intensity of the selling reflected in the Federal Reserve's data is particularly noteworthy. Swiber pointed out that since the last comparable sale recorded by the Federal Reserve in 2012, the U.S. debt market has expanded by approximately three times, making the current selling volume proportionally more significant. The yields on both two-year and ten-year U.S. Treasuries have seen their largest monthly gains of 2024, leading to a comprehensive increase in borrowing costs for governments, corporations, and individuals.
Some investors believe that the strengthening dollar itself prompts central banks to rebalance their portfolios and sell U.S. Treasuries to defend their currencies, implying a passive element to the decline in holdings. However, other views suggest that the current data more accurately reflects the demand from countries actively using reserve funds during market turmoil.
Stephen Jones, Chief Investment Officer at Aegon Asset Management, described this behavior as countries &#34;raising war chest funds,&#34; stating, &#34;They are drawing down emergency reserves.&#34;
<h2>Diversification Trend Accelerates, U.S. Debt's Reserve Status Long-Term Pressure</h2>
This wave of selling is not an isolated event but rather a microcosm of a longer-term structural shift.
In recent years, U.S. Treasury holdings managed by foreign official institutions at the Federal Reserve Bank of New York have been on a continuous decline, as global reserve managers systematically reduce their exposure to dollar-denominated assets. As the proportion of official holdings decreases, foreign private investors are becoming increasingly important in the U.S. Treasury market, serving as a key force supporting market liquidity.
Swiber stated that recent sales &#34;confirm a broader narrative—that foreign reserve managers and official accounts are diversifying away from U.S. Treasuries.&#34;
It is worth noting that analysts also caution that some U.S. Treasury holdings may have been transferred to custodial institutions other than the Federal Reserve Bank of New York, rather than being sold directly in the market, meaning the actual selling volume might be lower than what the Fed's data suggests. Nevertheless, the scale and trend reflected in the data have garnered widespread market attention.
Furthermore, Swiber pointed out that Middle Eastern oil exporting countries might also be selling U.S. Treasuries to offset fluctuations in their oil and gas revenues. However, due to their relatively small share among overall U.S. Treasury holders, their overall impact on the market is relatively limited.

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The Iran war has triggered an energy crisis, with global central banks selling off U.S. debt at the fastest pace in over a decade—a drop of $82 billion in just a few weeks to the lowest level since 2012. Oil importing nations like Turkey and India are bearing the brunt, forced to use reserves to defend their currencies. Behind the largest yield increase in over a year, the throne of U.S. debt as the world's No. 1 reserve asset is accelerating its erosion

- The ongoing conflict in Iran has led to a surge in energy prices, prompting global central banks to rapidly sell U.S. Treasury bonds to stabilize their economies and currencies.  
- Notably, foreign official holdings at the New York Federal Reserve have dropped by $82 billion since February 25, reaching their lowest level since 2012, while U.S. Treasury yields have seen their largest monthly increases in 2024.  
- This sell-off reflects a longer-term trend of foreign reserve managers diversifying their asset allocations, undermining the status of U.S. Treasuries as the primary reserve asset.

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Selling Debt to Raise Funds! Global Central Banks Slash U.S. Debt Holdings, Positions Down $82 Billion in One Month