Central banks are offloading US Treasury bonds; Chinese assets at their lowest in 18 years

The US Treasury Department building in Washington.

Saul Loeb | Afp | Getty Images

Foreign governments reduced U.S. Treasuries in March as war in the Middle East forced central banks to liquidate dollar reserves, defending local currencies against an energy shock that sent exchange rates tumbling.

China reduced its holdings to $652.3 billion, down about 6% from February, to the lowest level since September 2008, according to U.S. Treasury data released Monday evening in the United States.

Japan, the largest foreign holder of U.S. government debt, lost about $47 billion, to $1.191 trillion. Overall foreign assets fell to $9.25 trillion in March from $9.49 trillion in February.

The selloff occurred as the U.S.-Iran conflict and resulting surge in crude oil prices sent the yen and other Asian currencies tumbling. Regional economies dependent on Gulf oil imports, including Japan, have faced the biggest energy shock in decades, prompting policymakers to sell some of their dollar-denominated assets to finance monetary intervention.

“Given the increased financial volatility since the start of the Gulf War and the resulting pressure on exchange rates, particularly in Asia, it is not surprising that US Treasury holdings held by central banks have declined,” said Frédéric Neumann, chief Asia economist at HSBC.

“Intervention in the foreign exchange market to support local currencies will have led some central banks to sell part of their US Treasury holdings.”

The April data, expected next month, could show how far central banks are willing to go to stabilize their currencies.

Policymakers also tend to recalibrate portfolios during periods of market stress, with some selling reflecting tactical concerns about rising inflation and falling bond values ​​— a shift toward liquidity-like assets to ensure liquidity in the event of escalating intervention needs, Neumann said.

Treasuries have come under considerable pressure with yields rising as the Middle East conflict fueled inflation fears and prompted investors to demand higher compensation for holding U.S. debt.

The sell-off in foreign holdings also reflects falling bond prices, with foreign investors seeing a $142.1 billion loss in value of long-term Treasury holdings in March alone.

Bucking the trend, the United Kingdom added about $29.6 billion to its holdings to reach $926.9 billion in March, as several smaller holders withdrew.

“phantom assets”

China has gradually reduced its direct exposure to the Treasury since its holdings peaked at about $1.3 trillion in 2013, but analysts have long argued that official figures underestimate its true footprint in U.S. debt markets. Conservation hubs like Belgium and Luxembourg are widely seen as conduits for Chinese sovereign wealth and state-linked investments.

Including these “phantom assets,” their overall figure appears relatively stable, said Tianchen Xu, senior economist at the Economist Intelligence Unit. Belgium held $454.0 billion in U.S. government debt in March, roughly flat with February’s level, while Luxembourg’s holding levels have remained stable over the past year, around $439.4 billion.

“China’s global ownership of UST [is] remaining largely stable at the moment, with short-term market volatility the key driver for a decline in short-term holdings,” said Becky Liu, managing director of global research at Standard Chartered.

For Japan, the question of whether Tokyo will resort to a prolonged Treasury liquidation to finance a yen intervention has also attracted Washington’s attention in recent weeks.

The Bank of Japan reportedly intervened in foreign exchange markets in late March and early April after the yen weakened beyond the politically sensitive 160 level, as rising oil import costs widened Japan’s current account deficit and fueled fears of a depreciation spiral.

Vikas Pershad, portfolio manager at M&G Investments, told CNBC earlier this month that the signal from U.S. policymakers was clear: They hoped that “the preferred policy option [for Japan] does not sell Treasury bills. » He highlighted trade deals in critical minerals, advanced technology and defense as alternative opportunities that could help reduce pressure on Japan’s foreign exchange reserves.

Correction: Becky Liu is managing director of global research at Standard Chartered. An earlier version misstated the company name.

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