Treasury securities slide amid Gulf turmoil

Several foreign governments reduced their holdings of US Treasurys according to the latest data, with analysts suggesting the move may reflect efforts by central banks to buffer against energy-price shocks triggered by the US-Israeli war against Iran.

Japan, the largest foreign holder of United States government debt, shed its Treasury holdings by about $47 billion to $1.19 trillion, according to official data.

"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 US Treasury holdings by central banks have fallen," Frederic Neumann, chief Asia economist at HSBC, told CNBC.

March data from the Treasury International Capital System — the US government's tracker of cross-border capital flows — showed that India sold $7.6 billion in Treasurys, while Canada reduced its holdings by $6.9 billion and the United Arab Emirates by $5.8 billion.

Overall, foreign holdings of US Treasurys fell by $138.4 billion in March, a 1.5 percent decline from the previous month.

Some investors worry that the decline could signal waning confidence in US assets.

"The fear is the US is losing its standing as the safe haven," George Cipolloni, a fund manager at Penn Mutual Asset Management, told The Associated Press. "Our bond market is the biggest and most stable in the world, but when you add instability, bad things can happen."

However, Goldman Sachs said in a May 27 note that the selling wave was neither unusual nor indicative of a shift away from dollar assets. Instead, it said, the moves were consistent with historical reserve-management practices by central banks.

Not all countries reduced their Treasury holdings in March. The United Kingdom, the second-largest foreign holder of US government debt, bucked the trend by increasing its holdings by $29.6 billion to $926.9 billion. Germany also raised its holdings by $3.7 billion, according to the Treasury International Capital System.

Foreign demand

The US government finances budget deficits through borrowing, issuing Treasury securities to supplement tax revenue when spending exceeds income.

US Treasurys are debt securities issued by the Treasury Department. Foreign demand for Treasurys helps keep US borrowing costs in check, alongside factors such as Federal Reserve policy, inflation expectations and the country's fiscal policy.

However, US personal finance expert Suze Orman warned that a decline in demand for US government debt could carry broader economic consequences. If fewer investors are willing to buy Treasurys, the US government may have to offer higher yields to attract buyers, pushing up borrowing costs for households and businesses alike.

The dollar's global dominance is also facing increased scrutiny, leading to US government moves to bolster the currency.

Last year, US President Donald Trump signed the Guiding and Establishing National Innovation for US Stablecoins Act into law, aiming to offer a global, dollar-backed digital currency.

The White House said on July 18 that the legislation would "generate increased demand for US debt and cement the dollar's status as the global reserve currency" by requiring stablecoin issuers to back their tokens with US dollars and Treasury securities.

Mohammad N. Elahee, a professor of international business at Quinnipiac University in Connecticut, said a prolonged period of global instability stemming from the US-Israeli war against Iran could encourage more countries to diversify away from dollar-denominated transactions.

Goldman Sachs, meanwhile, argued that financial markets had largely stabilized after the initial shock of the Middle East conflict.

belindarobinson@chinadailyusa.com