Japan, China lead foreign government retreat from U.S. Treasurys as Iran war fallout stokes currency fears

Foreign governments cut U.S. Treasurys in March as the Middle East war 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 roughly 6% from February to the lowest level since September 2008, according to U.S. Treasury data released late Monday stateside. Japan, the single largest foreign holder of U.S. government debt, shed approximately $47 billion to $1.191 trillion. Overall foreign holdings fell to $9.25 trillion in March from $9.49 trillion in February. The sell-off came as the outbreak of the U.S.-Iran conflict and a subsequent surge in crude oil prices sent the yen and other Asian currencies tumbling. Regional economies reliant on Gulf oil imports, including Japan, faced the largest energy shock in decades, prompting policymakers to sell part of their dollar-denominated assets to fund currency intervention. "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," said Frederic Neumann, chief Asia economist at HSBC. "Exchange market intervention to support local currencies will have led some central banks to sell a share of their U.S. Treasury holdings." The data for April, due next month, may show just how far central banks are willing to go to stabilize their currencies. Policymakers also tend to recalibrate portfolios during bouts of market stress, with some selling reflecting tactical concerns about rising inflation and falling bond values — a move into cash-like assets to ensure liquidity should intervention needs escalate, Neumann said. Treasurys have come under significant pressure with yields surging as the Middle East conflict stoked inflation fears and prompted investors to demand higher compensation for holding U.S. debt. The sell-off in foreign holdings also reflected falling bond prices, as foreign investors logged a $142.1 billion valuation loss on long-term Treasury holdings in March alone. Bucking the trend, the U.K. added roughly $29.6 billion to its holdings to $926.9 billion in March, as several smaller holders pulled back.