Selling bonds to raise money! Central banks around the world slash their holdings of US Treasury bonds, with holdings dropping by $82 billion in one month

Selling bonds to raise money! Central banks around the world slash their holdings of US Treasury bonds, with holdings dropping by $82 billion in one month

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The Iran war has triggered a surge in energy prices, and central banks worldwide are selling U.S. Treasury bonds at the fastest pace in more than a decade to stabilize their economies and exchange rates.

Federal Reserve data shows that the scale of U.S. Treasuries held by foreign official institutions at the New York Fed has plunged by $82 billion since February 25 to $2.7 trillion, hitting the lowest level since 2012. Meanwhile, the yields on both two-year and ten-year U.S. Treasuries have posted their largest monthly gains so far in 2024, leading to a broad increase in borrowing costs.

Meghan Swiber, U.S. rate strategist at Bank of America, said, "Foreign official institutions are selling U.S. Treasuries." The combination of shrinking foreign exchange reserves and bond selling has further weighed on the already pressured U.S. Treasury market, intensifying investors' concerns about inflation driven by the conflict in the Middle East.

This wave of selling also reflects a deeper trend—global reserve management institutions have been diversifying dollar asset allocations for years, and the status of U.S. Treasuries as the primary global reserve asset is being increasingly eroded.

Oil-importing countries bear the brunt, Turkey sells the most

After Iran blocked the Strait of Hormuz, global oil prices soared, and oil-importing countries were hit hardest. Foreign exchange reserves shrank passively, combined with the need to intervene in currency markets, prompting central banks in many countries to accelerate the liquidation of U.S. Treasuries.

Brad Setser, senior fellow at the Council on Foreign Relations, pointed out that Turkey, India, Thailand, and other oil-importing countries are likely the main participants in this round of selling because these countries must pay higher oil prices in dollars. Official data shows that since February 27—the day before Iran was attacked—the Turkish central bank has sold $22 billion in foreign government bonds from its foreign reserves, and Setser believes a significant proportion of these were U.S. Treasuries.

Independent data from the central banks of Thailand and India also show that both countries' foreign exchange reserves have declined after the outbreak of the conflict, but it is not yet clear whether the reduction came from U.S. Treasuries or dollar deposits.

Setser said, "Many countries do not want their local currency to depreciate further, as this would push up local-currency oil prices, either resulting in more fiscal subsidies or causing residents greater hardship. Therefore, countries generally decide to intervene in currency markets to limit currency depreciation and local-currency oil price increases."

U.S. bond market under pressure, yields post biggest monthly rise in over a year

Currently, the U.S. bond market was already facing multiple pressures, and concentrated selling by foreign official institutions has made the situation even more complex.

The selling intensity reflected by Federal Reserve data is particularly noteworthy. Swiber pointed out that since the last time the Fed recorded similar selling in 2012, the size of the U.S. Treasury market has roughly tripled, making the current selling volumes more significant in terms of proportion. This month, both two-year and ten-year U.S. Treasury yields posted their largest gains in 2024, causing borrowing costs for governments, companies, and residents to rise across the board.

Some investors believe that the strengthening dollar itself prompts central banks to rebalance portfolios and sell U.S. Treasuries to defend their currencies, so part of the decline in holdings is passive. But others argue that the current data reflects active use of reserves by countries during market turmoil.

Stephen Jones, Chief Investment Officer at Aegon Asset Management, described this action as countries "raising war funds," saying, "They are drawing on emergency reserves."

Diversification trend accelerates, U.S. Treasuries’ reserve status pressured long-term

This round of selling is not an isolated event, but a microcosm of a longer-term structural shift.

In recent years, foreign official institutions' holdings of U.S. Treasuries at the New York Fed have steadily declined, as global reserve management institutions are systematically reducing exposure to dollar assets. With the official share of holdings decreasing, the importance of foreign private investors in the U.S. Treasury market has been rising, becoming a key force supporting market liquidity.

Swiber said the recent selling "confirms a more macro narrative—that foreign reserve managers and official accounts are diversifying away from U.S. Treasuries."

It is worth noting that analysts also remind us that some U.S. Treasury holdings may have been shifted to custodians outside the New York Fed rather than sold directly in the market, meaning the actual scale of selling may be lower than what Federal Reserve data suggests. Nevertheless, the scale and trend reflected by the data have attracted broad market attention.

Additionally, Swiber pointed out that Middle Eastern oil exporters may also sell U.S. Treasuries to compensate for fluctuations in oil and gas income, but as they account for a small share among overall holders of U.S. Treasuries, their overall impact on the market is relatively limited.

 

 

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