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

What is the impact of the new low in foreign holdings ratio on the U.S. debt market?

Since the outbreak of the U.S.-Iran conflict, global foreign central banks have continued to sell U.S. Treasuries at a large scale and rapid pace, triggering heightened market alert. The U.S. debt market is facing a severe test with multiple pressures stacking up.

Data from the New York Fed custody accounts show that starting from the week before the conflict (the week of February 25), foreign monetary authorities have sold U.S. Treasuries net for five consecutive weeks, with a total sell-off exceeding $90 billion, mainly concentrated in the last three weeks. The holdings of U.S. debt have fallen to the lowest level since 2012.

The direct cause of this round of U.S. debt sell-off is the urgent demand for dollar liquidity from various countries. From foreign exchange market interventions to paying energy import bills, and financing defense expenditures, the comprehensive surge in dollar demand is forcing central banks to liquidate their most liquid dollar assets—U.S. Treasuries.

This sell-off occurs against the backdrop of already pressured U.S. debt markets. Inflation concerns triggered by the Middle East conflict have driven the yields of two-year and ten-year U.S. Treasuries to their largest monthly increases since 2024, raising borrowing costs for governments, corporations, and residents. Meanwhile, a recent report from Morgan Stanley shows that the proportion of U.S. Treasuries held by foreign investors has fallen to its lowest level since 1997, further intensifying concerns about structural weakening in demand for U.S. debt.

Five weeks of selling exceeding $90 billion, with concentrated pressure in the last three weeks

Data from the New York Fed custody accounts show that foreign central banks have reduced holdings of U.S. Treasuries for five consecutive weeks starting from the week of February 25, with a total sell-off exceeding $90 billion, bringing holdings to the lowest since 2012. Notably, the pace of selling accelerated significantly in the last three weeks, indicating that as the conflict persists, the liquidity needs of central banks are becoming more urgent.

Meghan Swiber, a U.S. interest rate strategist at Bank of America, said, “Official foreign sectors are selling U.S. Treasuries,” and pointed out that oil-producing countries in the Middle East may also be selling related assets to make up for oil revenue shortfalls. Stephen Jones, Chief Investment Officer at Aegon Asset Management, described this behavior as countries “stockpiling war reserve funds,” “they are drawing down emergency reserves.”

Other analysts also pointed out that some U.S. debt holdings may have been transferred to other custodians outside the New York Fed rather than directly sold, but this possibility is relatively low. Swiber also emphasized that since 2012, the size of the U.S. debt market has roughly doubled, making the current sell-off scale particularly noteworthy in this context.

Turkey leads the sell-off, multiple countries use foreign exchange reserves

Among countries with disclosed specific data, Turkey’s sell-off scale is the most prominent. Official data show that since February 27 (the day before the U.S. attack on Iran), the Turkish central bank has sold about $22 billion worth of foreign government bonds from its foreign exchange reserves, mainly U.S. Treasuries. At the same time, Turkey has also sold or swapped about 58 tons of gold, worth over $8 billion, which has noticeably weighed on gold prices.

Independent data from the central banks of Thailand and India also show that their foreign exchange reserves have continued to decline since the outbreak of the war, but it is currently unclear whether the reduction is due to U.S. Treasury sales or dollar deposits. Analysts expect that countries like India and Thailand, which purchase oil priced in dollars, will face ongoing reserve depletion pressures.

Kuwait, Saudi Arabia, and the UAE held a total of $313 billion in U.S. Treasuries in January. Their holdings have generally increased since 2022, especially the UAE’s significant increase. The market widely expects that these Middle Eastern oil-producing countries may also join the sell-off to cope with the war-related defense spending and energy price shocks.

Foreign holdings ratio drops to lowest since 1997

A recent report from Morgan Stanley’s interest rate team, published over the weekend, provides a deeper structural background for the above sell-off concerns. Based on analysis of the Federal Reserve’s Financial Accounts (Z.1), it shows that foreign investors’ holdings of U.S. Treasuries as a proportion of total have fallen to 32.4%, the lowest since 1997.

From a detailed structure perspective, holdings of coupon-bearing U.S. Treasuries by foreign investors decreased by $56.3 billion in Q4 2025, driving the overall decline in foreign holdings; meanwhile, holdings of short-term Treasury bills increased by $31.8 billion, reaching a record high of $1.45 trillion.

The report further notes that the proportion of coupon-bearing U.S. Treasuries held by foreign investors has been declining since its peak of 64.4% in 2008, now approaching multi-decade lows; the quarterly change in foreign demand for coupon-bearing Treasuries has been continuously weakening since mid-2023, indicating that the structural demand weakness among foreign investors predated this round of conflict.