Since the Iran war, global central banks have sold $90 billion in US Treasury bonds.

Since the outbreak of the US-Iran conflict, foreign central banks around the globe have continued to sell off US Treasury bonds at a scale and speed that has raised high market vigilance. The US Treasury market is facing severe tests with multiple pressures accumulating.

New York Fed custody data shows that since the week before the conflict broke out (week of February 25), foreign monetary authorities have been net sellers of US Treasuries for five consecutive weeks, with a total sell-off exceeding $90 billion, and the selling pressure mainly concentrated in the last three weeks. Holdings of US Treasuries have dropped to the lowest levels since 2012.

The direct cause of this round of selling is the urgent need for dollar liquidity among countries. From foreign exchange market intervention to paying energy import bills and financing defense spending, the surge in demand for dollars is forcing foreign central banks to liquidate their most liquid dollar assets—US Treasuries.

This sell-off is occurring against a backdrop in which the US Treasury market was already under pressure. Inflation concerns sparked by the Middle East conflict have pushed the yields of two-year and ten-year US Treasuries to their largest monthly increase so far in 2024, raising lending costs for government, corporations, and households. Meanwhile, a recent report from Morgan Stanley shows the proportion of US Treasuries held by foreign investors has dropped to its lowest since 1997, further exacerbating worries about structurally weakening demand for US Treasuries.

Over $90 billion sold in five weeks, selling pressure focused in the last three

New York Fed custody account data show that foreign central banks have cut US Treasury holdings for five consecutive weeks since the week of February 25, with the total sell-off exceeding $90 billion and holdings falling to the lowest point since 2012. Notably, the selling accelerated in the last three weeks, indicating that as the conflict persists, the liquidity needs of central banks are becoming more urgent.

US rates strategist Meghan Swiber from Bank of America stated, "Foreign official sectors are selling US Treasury bonds," and pointed out that Middle Eastern oil producers may also be selling assets to make up for shortfalls in oil income. Stephen Jones, Chief Investment Officer at Aegon Asset Management, described this behavior as countries "stockpiling war funds," saying, "They are tapping emergency reserves."

Other analysts noted that some Treasury holdings may have been transferred to custodians outside the New York Fed rather than direct sales, although this possibility is relatively low. Swiber emphasized that since 2012, the US Treasury market has roughly doubled in size, making this sell-off particularly noteworthy in context.

Turkey leads the sell-off, multiple countries tap into foreign reserves

Among countries with disclosed data, Turkey stands out with the most significant sell-off. Official figures show that since February 27 (the day before the US attacked Iran), Turkey’s central bank has sold about $22 billion in foreign government bonds from its reserves, mainly US Treasuries. Meanwhile, Turkey also sold or swapped about 58 tons of gold, valued at over $8 billion, which had a clear drag on gold prices.

Independent data from the central banks of Thailand and India likewise show that both countries’ foreign reserves have continued to fall since the outbreak of war, though it is unclear if the decrease is due to Treasury bond sales or dollar deposits. Analysts expect that countries like India and Thailand, which buy oil priced in dollars, will face continued pressure to draw down reserves.

Kuwait, Saudi Arabia, and the UAE held a combined $313 billion in US Treasuries as of January this year, with their holdings overall trending upward since 2022, especially clear increases for the UAE. The market generally expects these Middle Eastern oil exporters may also join the sell-off to address defense spending and energy price shocks caused by the conflict.

Share of foreign holdings drops to lowest since 1997

The latest report from Morgan Stanley's rates team over the weekend offers deeper structural context for the above sell-off concerns. Based on the Fed's financial accounts (Z.1) data, the proportion of US Treasuries held by foreign investors has dropped to 32.4%, the lowest since 1997.

Looking at the structure, foreign investors’ holdings of coupon-bearing Treasury securities decreased by $56.3 billion quarter-on-quarter in Q4 of 2025, the main driver of the overall decline. At the same time, holdings of short-term Treasury bills increased by $31.8 billion, hitting a historical high of $1.45 trillion.

The report further states that the proportion of coupon-bearing Treasuries held by foreign investors has been falling steadily since the 2008 peak of 64.4% and is now near multi-decade lows. The quarterly change in demand for coupon-bearing Treasuries from foreign investors has been declining since mid-2023, indicating that the structural weakening of foreign demand began well before the current conflict.

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