Foreign Treasury Holdings Fall to $9.25 Trillion as Gulf War Drives Currency Defense

A $240 Billion Fall as Currency Pressure Spreads

Foreign holdings of U.S. Treasury securities fell to $9.25 trillion in March from $9.49 trillion in February, as the war between the United States and Iran pushed up oil prices and put currencies across Asia under pressure. Central banks sold dollar assets to support their currencies, while falling bond prices also reduced the value of the securities foreign investors continued to hold.

China's reported holdings dropped roughly 6 percent to $652.3 billion, their lowest level since September 2008. Japan, the largest foreign holder of American government debt, reduced its position by approximately $47 billion to $1.191 trillion. Seven of the ten largest foreign holders recorded declines during the month.

The $240 billion reduction in total foreign holdings amounted to about 2.5 percent of February's level. It combined two different movements: investors selling securities and the market value of existing investments falling. Foreign investors recorded $142.1 billion in valuation losses on long term Treasury holdings during March alone.

Foreign central banks made one of their largest collective retreats from U.S. government debt in recent years as policymakers faced a pressing domestic problem. Higher oil import bills were weakening local currencies, making imported fuel still more expensive and adding to inflation.

The pressure was particularly strong in economies dependent on Gulf oil, including Japan, which faced their largest energy shock in decades. Governments and central banks needed dollars for intervention, while reserve managers also sought cash that could be deployed quickly if financial conditions worsened. The result was a broad retreat from some Treasury positions, even as other foreign investors continued buying American assets.

Why Supporting a Currency Can Mean Selling Bonds

Central banks hold foreign currency reserves to meet financial needs and respond to market stress. Part of those reserves is invested in U.S. Treasuries, which are securities through which investors lend money to the American government. Selling them can release dollars for use in currency markets.

A central bank defending its currency can sell dollars and buy its own money. That creates demand for the local currency and can slow its decline. During March's energy shock, this process connected pressure in Asian exchange markets with sales in the American bond market.

Frederic Neumann, chief Asia economist at HSBC, said the decline in Treasury holdings was an expected response to the financial turbulence surrounding the Gulf war.

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. 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 said reserve managers tend to adjust their portfolios during periods of stress. Some selling reflected tactical concerns about rising inflation and declining bond values. Moving into assets that function much like cash gave policymakers more readily available money if intervention needs increased.

Higher bond yields added another source of pressure. A yield is the return available at a bond's current price, and yields rise when prices fall. Reserve managers therefore faced weaker currencies at home and falling market values for part of the assets they might sell to support them.

Japan Faces an Expensive Energy Shock

Japan's dependence on imported energy made the rise in crude prices especially difficult. The country imports nearly all its energy, and higher oil costs worsened its trade balance, widened its current account deficit and increased concern about further yen depreciation.

The current account tracks trade and other income flows between a country and the rest of the world. More expensive imports increase the money flowing out to pay overseas suppliers. A weaker yen then raises the domestic cost of purchases priced in dollars, squeezing household purchasing power and adding to inflation.

In late March and early April, the Bank of Japan was reported to have intervened in currency markets after the yen weakened beyond 160 to the dollar. That politically sensitive level heightened fears that depreciation could gather pace and place broader economic stability at risk.

Other Asian economies faced similar pressure as investors assessed higher energy bills and the possibility of sustained inflation. Central banks drew on reserves, selling Treasury securities to obtain dollars that could then be exchanged for local currencies.

The developments unfolded across several periods, with the March Treasury figures capturing only part of the story:

• During 2025, India reduced its Treasury holdings by 21 percent, its first annual decline in four years.
• In February, total foreign Treasury holdings stood at $9.49 trillion.
• In March, holdings fell to $9.25 trillion as sales and valuation losses reduced reported positions.
• In late March and early April, intervention was reported after the yen weakened beyond 160 per dollar.
• As of May 29, the April holdings data were due the following month.

China's Decline Extends a Much Longer Shift

China's $652.3 billion reported Treasury position continued a decline from a peak of around $1.3 trillion in 2013. The latest figure was roughly half that earlier level. March's reduction stood out because it occurred during acute market stress, against a backdrop of more gradual reductions over previous years.

Becky Liu, managing director of global research at Fidelity International, attributed the recent movement to market turbulence rather than a fundamental strategic withdrawal. She said China's total Treasury position remained largely stable, with volatility over a short period driving the latest monthly decline.

Understanding that assessment requires looking beyond the country totals in the Treasury International Capital report. Those figures show where holdings are recorded, while financial institutions can keep securities for clients based elsewhere. A country associated with a custody account may therefore be different from the country of the ultimate investor.

Belgium and Luxembourg are widely viewed as channels for Chinese sovereign wealth and investment pools linked to the state. Belgium held $454.0 billion in U.S. government debt in March, roughly unchanged from February. Luxembourg's holdings remained near $439.4 billion over the past year.

These custody arrangements complicate efforts to measure Beijing's full exposure. The directly reported Chinese position captures only part of the sovereign wealth visible through American custody and reporting channels. State commercial banks and sovereign wealth vehicles operating outside direct central bank reporting add further difficulty.

Where China's Dollar Assets May Be Held

Brad Setser, a senior fellow at the Council on Foreign Relations, has tracked how Chinese authorities spread investments across asset classes and financial centers. His work examines holdings beyond the China line in the monthly Treasury data.

After the G7 immobilized Russian reserves in early 2022, Chinese reserve managers appeared to reduce their use of Euroclear, the custodian based in Belgium that had previously absorbed a large share of Beijing's Treasury purchases. Treasury holdings recorded in the United Kingdom, France and Luxembourg subsequently rose together, suggesting a wider distribution of accounts linked to the Chinese state.

Setser described the central challenge in estimating the total:

The hard part is estimating just how many bonds China holds through the various custodial and financial centers around the world.

His analysis adjusts for holdings routed through Belgium, Luxembourg, the United Kingdom, France and Canada. With those adjustments, China's total U.S. financial holdings likely remain between 50 and 55 percent of its reserve portfolio.

Much of that exposure is now in agency bonds and Treasury bills with shorter maturities rather than long term Treasuries. Agency bonds are debt issued by U.S. agencies or institutions associated with the government. Shorter maturity bills return the invested principal sooner, giving reserve managers earlier access to their money.

China's reduced directly reported Treasury position therefore sits alongside a potentially much steadier aggregate position in dollar assets. Changes in custody location and the types of securities held make the full portfolio harder to follow through a single monthly country figure.

Tokyo Balances Yen Support With Pressure From Washington

Japan's position as the largest foreign holder of U.S. government debt gives its reserve decisions wider importance. Sustained Treasury sales to finance yen purchases could affect global bond markets and raise borrowing costs for the American government.

Washington has closely watched whether Tokyo will continue selling. Vikas Pershad, portfolio manager at M&G Investments, described the preference conveyed by American policymakers:

The signal from U.S. policymakers was clear that they hoped the preferred policy option for Japan is not selling Treasuries.

American and Japanese officials have explored other ways to ease pressure on Japan's foreign exchange reserves. Greater trade cooperation in critical minerals, advanced technology and defense procurement could improve Japan's current account position and reduce the need to liquidate reserve assets.

Japan also faces forces drawing private capital home. Domestic government bond yields have reached their highest levels since the 1990s as the Bank of Japan tightened policy. After decades of returns close to zero, Japanese debt has become more attractive to investors who previously sought income abroad.

March brought record monthly inflows into Japanese sovereign bond funds, suggesting private investors were beginning to bring money back. Matt Smith, a fund manager at Ruffer, expected pressure on institutions to repatriate capital to increase as domestic yields rose. He warned that yen strength could develop slowly at first and then accelerate rapidly.

India and Brazil Reduce Exposure as Gold Gains Ground

The retreat extended beyond East Asia to major emerging economies, including members of BRICS. India cut Treasury holdings to $190.7 billion from $241.4 billion during 2025, a reduction of $50.7 billion, or 21 percent. It was India's first annual decline in four years.

Brazil also reduced its position as reserve managers reassessed how much of their portfolios to concentrate in dollar assets. India's annual figures cover a different period from the March movements in Japan and China, showing a broader adjustment already under way before the latest monthly selloff.

Dipanwita Mazumdar, an economist at Bank of Baroda, described India's reduction as a strategic change rather than simply a calculation about returns. She said India was diversifying reserve management and gradually reducing dependence on the American currency amid expectations of a weaker dollar and rising geopolitical risks.

Gold has become a larger part of this shift. According to International Monetary Fund data, foreign central banks collectively held more gold than U.S. Treasuries for the first time since 1996. Gold's share of global reserves rose to roughly 18 percent in 2024, supported by record purchases from China, Russia and Turkey.

Reserve managers are attracted to gold because it carries no counterparty risk: its value does not depend on a borrower repaying a debt. They also view holdings outside the financial channels exposed to sanctions as protection against geopolitical restrictions.

Concerns about using financial infrastructure as a political weapon, together with growing geopolitical divisions, support the continuing shift toward gold and instruments outside the dollar. That longer adjustment operates alongside shorter movements driven by exchange rates, liquidity needs and bond prices.

Private Buyers Keep Money Moving Into U.S. Assets

Foreign investment continued to enter the United States even as total Treasury holdings fell. The United Kingdom added roughly $29.6 billion in March, taking its reported position to $926.9 billion. Private foreign investors also continued buying American corporate bonds and equities.

Treasuries recorded inflows of $13.5 billion on a transaction basis during March. Transaction figures measure purchases and sales, while the value of total holdings also changes with market prices. Net buying can therefore occur in the same month that the recorded value of foreign holdings falls sharply.

The March figures show private funds and hedge funds responding to prices and partly offsetting central bank sales. They also show a change in the mix of investors financing the United States, with less support from some official reserve managers and more from investors whose positions can shift quickly.

Central banks have historically supplied a relatively stable and predictable base of Treasury demand. Hedge funds often pursue trades designed to profit from small price differences between related securities, making their demand dependent on trading conditions.

One example is the basis trade, which seeks to profit from a gap between the price of a Treasury bond and a related futures contract. A futures contract sets terms for a transaction at a later date. A larger role for such strategies can make market liquidity more fragile, meaning that buying or selling substantial amounts without moving prices may become harder during stress.

Rising U.S. Borrowing Needs Meet Less Predictable Demand

The shift in foreign demand comes as the Gulf conflict has increased inflation fears and pushed Treasury yields higher. Investors have sought greater compensation for holding American debt, while demand at recent auctions of long term securities has weakened.

The Treasury Department sold bonds maturing in 30 years at yields above 5 percent for the first time since 2007. Higher yields help attract buyers, while also increasing the cost of new borrowing for the government.

The United States faces a widening federal deficit and annual interest costs near $1 trillion. Financing those obligations requires issuing larger amounts of debt at a time when some of the most dependable foreign official buyers are reducing their positions.

March combined an immediate need for currency defense with longer changes in reserve management. Japan's energy exposure, China's use of overseas custody centers, India's diversification and central bank gold purchases each help explain different parts of that adjustment.

The April Treasury figures, due in June, were the next scheduled measure of whether the March reduction continued. As of May 29, the duration of the retreat was still unsettled. The next release would show whether foreign holdings recovered, declined further or shifted among countries and investor groups.

What to Know

• Total foreign Treasury holdings fell from $9.49 trillion in February to $9.25 trillion in March, reflecting sales and valuation losses.
• China's reported holdings declined roughly 6 percent to $652.3 billion, their lowest level since September 2008.
• Japan reduced its position by approximately $47 billion to $1.191 trillion as pressure on the yen and energy import costs intensified.
• Foreign investors recorded $142.1 billion in valuation losses on long term Treasuries, while transaction figures still showed $13.5 billion in Treasury inflows.
• Overseas custody accounts make China's full exposure harder to measure; Setser estimates U.S. financial holdings at 50 to 55 percent of its reserve portfolio.
• India cut its Treasury holdings by 21 percent during 2025, while central bank gold holdings overtook Treasuries for the first time since 1996.
• The United Kingdom added $29.6 billion in March, and private foreign investors continued buying U.S. corporate bonds and equities.
• April holdings data were due in June, with U.S. borrowing needs rising and some foreign official buyers stepping back.