Foreign governments sharply reduced their holdings of U.S. Treasuries in March as the war-linked surge in oil prices and currency volatility rattled global markets and forced several central banks to defend weakening currencies, according to a new report.
China cut its holdings of U.S. government debt to $652.3 billion in March, the lowest level since September 2008, while Japan, the largest foreign holder of Treasuries, reduced its position by about $47 billion to $1.191 trillion, according to U.S. Treasury Department data released Monday. Overall foreign holdings fell to $9.25 trillion from $9.49 trillion in February.
The declines came as the war in Iran has driven crude oil prices sharply higher, increasing pressure on oil-importing economies across Asia and weakening regional currencies, including the Japanese yen. Analysts said central banks sold portions of their dollar reserves, including Treasuries, to support local currencies during the market turmoil.
“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,” Frederic Neumann, chief Asia economist at HSBC, told CNBC. “Exchange market intervention to support local currencies will have led some central banks to sell a share of their U.S. Treasury holdings.”
The yen weakened past the closely watched 160 level against the U.S. dollar during the period, intensifying pressure on Japanese policymakers. Reuters reported that Japanese authorities spent nearly 10 trillion yen in market intervention efforts since late April as officials sought to stabilize the currency amid rising energy import costs and heightened geopolitical tensions.
Treasury markets also came under pressure as investors reacted to rising inflation concerns tied to the Middle East conflict. Oil prices surged after fighting involving Iran threatened shipping routes and fueled fears of broader supply disruptions, as reported by Bloomberg.
The Treasury selloff reflected both direct liquidation and declining bond values. The CNBC report adds that foreign investors recorded a $142.1 billion valuation loss on long-term Treasury holdings during March alone as yields climbed and bond prices fell.
Japan’s Treasury holdings remained the largest among foreign governments despite the decline. Tokyo’s Treasury position dropped nearly 4% from February levels, although Japan continued to hold more than $1.19 trillion in U.S. debt. China remained the third-largest foreign holder behind the United Kingdom.
While Japan and China reduced holdings, the United Kingdom increased its Treasury position by roughly $29.6 billion to $926.9 billion in March. Analysts have often viewed U.K. Treasury flows as a proxy for global investment activity because London serves as a major financial hub for international investors.
China’s Treasury holdings have steadily declined over the past decade from a peak of roughly $1.3 trillion in 2013. Economists, however, said official data may not fully capture Beijing’s exposure because some Chinese investments are believed to be routed through custodial centers such as Belgium and Luxembourg.
Belgium held approximately $454 billion in U.S. government debt in March, while Luxembourg’s holdings remained near $439 billion over the past year, according to data cited by CNBC.
“China’s overall holding of USTs [is] staying largely stable for the time being, with short-term market volatility being the key factor driving a decline in near-term holding,” Becky Liu, managing director of global research at Fidelity International, told CNBC.
Concerns over currency intervention and Treasury liquidation have also drawn attention in Washington. Vikas Pershad, portfolio manager at M&G Investments, told CNBC that U.S. policymakers preferred Japan avoid large Treasury sales to stabilize the yen. He pointed to trade agreements involving critical minerals, advanced technology and defense as alternative ways to reduce pressure on Japan’s foreign exchange reserves.
Meanwhile, broader market stress tied to the Middle East conflict continued to ripple through global currencies. According to Reuters, the Indian rupee fell to another record low on Tuesday as elevated oil prices and rising U.S. Treasury yields intensified pressure on import-heavy economies.
