Foreign governments cut their holdings of U.S. Treasury bonds sharply in March, as the outbreak of fighting in the Middle East sent oil prices surging and pushed Asian currencies into freefall, forcing central banks to liquidate dollar reserves to defend their exchange rates.
China reduced its holdings to $652.3 billion, down roughly 6% from February, according to U.S. Treasury data released late Monday. That is the lowest level since September 2008. Japan, the single largest foreign holder of U.S. government debt, shed approximately $47 billion, bringing its holdings to $1.191 trillion. Overall foreign holdings fell to $9.25 trillion in March from $9.49 trillion in February.
The selloff came as the U.S.-Iran conflict and a surge in crude oil prices sent the Japanese yen and other Asian currencies tumbling. Regional economies that depend heavily on Gulf oil imports, including Japan, faced what analysts described as the largest energy shock in decades. Policymakers responded by selling part of their dollar-denominated assets to fund currency intervention.
"Given increased financial volatility since the start of the war in the Gulf, and resultant pressure on exchange rates, especially in Asia, it is not a surprise that U.S. Treasury holdings by central banks have fallen," said Frederic Neumann, chief Asia economist at HSBC. "Exchange market intervention to support local currencies will have led some central banks to sell a share of their U.S. Treasury holdings."
Neumann also noted that policymakers tend to recalibrate portfolios during periods of market stress, with some selling reflecting tactical concerns about rising inflation and falling bond values, as investors move into cash-like assets to ensure liquidity in case intervention needs escalate.
The scale of the losses was significant. Foreign investors logged a $142.1 billion valuation loss on long-term Treasury holdings in March alone, as yields surged on inflation fears tied to the Middle East conflict. Investors demanded higher compensation for holding U.S. debt, pushing bond prices down across the board.
Not every country pulled back. The United Kingdom added roughly $29.6 billion to its holdings, bringing its total to $926.9 billion in March, bucking the broader trend as several smaller holders also retreated.
China's position is more complicated than the official numbers suggest, according to CNBC. Analysts have long argued that official figures undercount China's true exposure to U.S. debt markets, pointing to custodial centers like Belgium and Luxembourg as conduits for Chinese sovereign wealth and state-linked investment. If those shadow holdings are included, their aggregate figure appeared relatively steady. Belgium held $454.0 billion of U.S. government debt in March, roughly flat from the February level, while Luxembourg's holdings have been stable over the past year at around $439 billion, according to Tianchen Xu, senior economist at the Economist Intelligence Unit.
Treasury data for April, due next month, may show how far central banks are willing to go to stabilize their currencies if the energy shock persists.