To The Moon

Following the outbreak of the Iran war, multiple central banks have engaged in large-scale sales of US Treasury bonds to cover the costs of expensive crude oil and to support their domestic currencies. The value of US Treasuries held in custody at the New York Federal Reserve has sharply decreased to $2.7 trillion, marking the lowest level since 2012. The sell-off highlights the severe financial strain on oil-importing nations, exacerbated by Iran's blockade of the Strait of Hormuz, which has triggered a surge in energy prices. Concurrently, the broad strengthening of the US dollar has added further pressure. Many central banks have also intervened in foreign exchange markets to support their currencies, operations that typically require selling US dollars. According to US Bank interest rate strategist Meghan Swiber, "Foreign official institutions are selling US Treasuries." Brad Setser, a senior fellow at the Council on Foreign Relations who specializes in foreign holdings of US debt, suggested that oil-importing countries such as Turkey, India, and Thailand are likely the primary sellers, as they need US dollars to pay for high-priced crude oil. Official data indicates that since February 27, the day before the US-Israel strikes on Iran, the Turkish central bank has sold $22 billion in foreign government bonds from its reserves. Setser noted that a significant portion of these were probably US Treasuries. Separate data from the central banks of Thailand and India also show continuous depletion of foreign reserves since the war began, although it is unclear whether this involved selling Treasuries or dollar deposits. Setser explained, "Many countries are unwilling to see their currencies depreciate further, as this would increase the local currency cost of oil—either raising pressure for fiscal subsidies or increasing the burden on citizens. Therefore, foreign exchange intervention to limit depreciation and imported inflation is a common choice." Swiber from US Bank pointed out that Middle Eastern oil exporters might also be reducing their Treasury holdings to offset declines in oil revenue, although they represent a smaller proportion of overall holders. US Treasuries are a core reserve asset for global central banks, owing to the $30 trillion Treasury market being the world's largest and most liquid bond market. The concentrated selling by foreign central banks comes as the Treasury market is already under pressure, with traders worried that Middle East conflict could fuel inflation. Yields on 2-year and 10-year US Treasuries have recorded their largest increases in 2024, raising borrowing costs for the US government, businesses, and households. Some investors view the selling of Treasuries during dollar strength as a routine practice for asset rebalancing and currency support. Others interpret it as a sign that holders are urgently mobilizing reserve funds amid market volatility. Stephen Jones, Chief Investment Officer at Aegon Asset Management, stated that the data suggests foreign official holders may be liquidating Treasuries to bolster emergency funds. "They are raising emergency cash," he said. Analysts also noted that some reductions in custody holdings might simply reflect a transfer to custodians other than the New York Fed, rather than an outright sale. However, Swiber emphasized that the scale of selling recorded in Fed data remains significant, especially considering that the Treasury market has grown approximately threefold since 2012. In recent years, as reserve managers pursue de-dollarization and asset diversification, foreign official holdings of US Treasuries at the Fed have been on a declining trend. Foreign private investors have become increasingly important participants in the market. According to Swiber, the recent sell-off "reflects a broader trend: reserve managers and official accounts are continuously reducing their US Treasury holdings and advancing diversification efforts."