Japan, China lead foreign government retreat from U.S. Treasuries as Gulf War fallout stokes currency fears

The US Treasury Department in Washington, DC, US, on Thursday, April 16, 2026. Taxday inflows jolted the US Treasury’s cash balance on Wednesday, lifting it by the most since September, a shift that briefly pulled liquidity out of the financial system even as pressures remained contained.

Matt McClain | Bloomberg | Getty Images

Foreign governments cut U.S. Treasuries 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 selloff came as the outbreak of the U.S.-Iran conflict and a subsequent surge in crude oil prices sent the Japanese 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.

Policy makers 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.

Treasuries 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 selloff 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.

‘Shadow holdings’

China has been gradually reducing its direct Treasury exposure since peak holdings of around $1.3 trillion in 2013, but analysts have long argued official figures undercount its true footprint in U.S. debt markets. Custodial centers like Belgium and Luxembourg are widely seen as conduits for Chinese sovereign wealth and state-linked investment.

If such “shadow holdings” are included, their aggregate figure appeared relatively steady, said Tianchen Xu, senior economist at the Economist Intelligence Unit. Belgium held $454.0 billion of U.S. government debt in March, roughly flat from the February level, while Luxembourg’s holding levels have been stable over the past year, around $439.4 billion.

“China’s overall holding of USTs [is] staying largely stable for the time being, with short-term market volatility being the key factor driving a decline in near-term holding,” said Becky Liu, Managing Director of Global Research and Fidelity International.

For Japan, the question of whether Tokyo will resort to sustained Treasury liquidation to fund yen intervention has also drawn attention in Washington in recent weeks.

The Bank of Japan was reported to have intervened in currency markets in late March and early April after the yen weakened past the politically sensitive 160 level, as surging oil import costs widened Japan’s current account deficit and stoked 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 that they hoped “the preferred policy option [for Japan] is not selling Treasuries. He pointed to trade deals in critical minerals, advanced technology, and defense as alternative opportunities that could help reduce pressure on Japan’s foreign exchange reserves.