In the wake of the Iran war, central banks around the world are selling U.S. Government Bonds one after another. As U.S. Government Bonds, long called the ultimate safe asset in global financial markets, are mobilized as countries' means of defending foreign exchange, tension is spreading across markets.
The Financial Times (FT) reported that the holdings of U.S. Government Bonds by foreign central banks and governments and international organizations kept at the Federal Reserve Bank of New York fell by about $82.0 billion (about 12.3 trillion won) over the past month to around $2.7 trillion. That is the lowest level since 2012.
The direct backdrop for foreign central banks selling U.S. Government Bonds is the surge in oil prices due to Iran's blockade of the Strait of Hormuz. Countries with a high share of crude oil imports are cashing in the U.S. Government Bonds they hold to cover soaring dollar payment bills. Brad Setser, a senior fellow at the Council on Foreign Relations (CFR), said, "Countries with high import dependence such as Turkey, India and Thailand are unable to withstand the fiscal pressure from rising oil prices and are selling Government Bonds." FT said, "The Central Bank of Turkey sold as much as $22.0 billion (about 33.2134 trillion won) of foreign Government Bonds immediately after the war," adding, "The market sees a significant portion of this as likely to be U.S. Government Bonds."
The strong dollar driven by war jitters is also fanning the sale of Government Bonds. When their own currencies plunge, import prices can soar uncontrollably, so central banks are intervening in markets by releasing dollars raised from selling U.S. Government Bonds to induce exchange rate declines (currency appreciation).
The problem is that as sales of U.S. Government Bonds increase, market supply is expanding and yields are surging as a result. Yields on the U.S. 2-year and 10-year Government Bonds have risen by the most since 2024 this month, stoking financial market anxiety. This could lead to higher borrowing costs for households and corporations not only in the United States but worldwide.
Megan Swiber, a strategist at Bank of America (BofA), said, "Even though the size of the U.S. Government Bonds market has tripled since 2012, the holdings have fallen to the level of that time, which means the selling pressure is that strong," adding, "The trend of foreign official institutions moving away from asset portfolios centered on U.S. Government Bonds to seek diversification is accelerating."