Foreign investors now hold just 32.4% of outstanding US Treasuries — the lowest share since 1997 — according to Morgan Stanley analysis of Federal Reserve flow-of-funds data. The retreat predates the Iran war by years, but the conflict has sharpened it into an acute pressure point, eroding a buyer base that underwrote cheap US government borrowing for decades.
At the height of the Global Financial Crisis, foreign investors held more than 50% of outstanding Treasuries. That share dropped steadily over the following decade and a half, driven by reserve diversification, geopolitical friction, and a Treasury market that has more than tripled in size since 2012, while foreign demand has failed to keep pace.
JPMorgan Research calculates that every 1-percentage-point reduction in foreign holdings relative to GDP — roughly $300 billion in Treasuries — lifts yields by more than 33 basis points. With the foreign share down more than 20 percentage points from its peak, the cumulative drag on US borrowing costs was already building before a single shot was fired in Iran.
In the fourth quarter of 2025, foreign investors cut longer-term coupon bond holdings by $56.3 billion while adding $31.8 billion in short-term Treasury bills — lifting T-bill holdings to a record $1.45 trillion. Morgan Stanley analysts characterize this as a duration retreat rather than a wholesale exit: foreign capital is shifting toward the short end of the curve, where sensitivity to long-term US fiscal risk is lower.
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The problem is that the US Treasury has leaned heavily on that same short end to finance its deficits, with 4-week bill auctions averaging $101 billion per offering in 2026, up from $47 billion in 2016. Short-term debt requires continuous rollover, and any disruption — an inflation spike, a credit event, a geopolitical shock — compounds rapidly into higher borrowing costs across the board.
China, once the second-largest foreign holder of Treasuries, dropped below $1 trillion in April 2022 and has trended lower since. Its holdings stood at $683.5 billion as of December 2025, per Treasury International Capital data — less than half the roughly $1.3 trillion peak around 2013–2014.
Japan, the largest single foreign holder, slipped to $1.185 trillion in December 2025, down from a November peak of $1.202 trillion, as rising domestic yields made holding US debt less attractive.
The official sector has been rotating into gold. Central bank gold holdings surpassed total foreign official Treasury holdings for the first time in September 2025, reaching $5.1 trillion by January 2026, led by China, Russia, and Turkey.
JPMorgan frames this as de-dollarization in fixed income: the dollar’s share of global foreign exchange reserves has declined alongside the US share of global GDP and exports, with official demand for Treasuries stagnating even as the market has grown. Foreign private investors have partially filled the gap but favor equities and short-duration instruments over long bonds.
The structural drift turned into a concentrated sell-off after US and Israeli forces struck Iran on February 28. Foreign monetary authorities sold Treasuries for five consecutive weeks, cutting holdings at the New York Fed by more than $90 billion and pushing the custody account to its lowest level since 2012. Oil-importing nations — Turkey, India, Thailand — led the selling, liquidating dollar reserves to defend weakening currencies and cover energy import bills as oil topped $100 per barrel.
Turkey’s central bank sold $22 billion in foreign government securities in the weeks following February 27, with analysts saying the bulk were likely US Treasuries.
Meghan Swiber, US rates strategist at Bank of America, said the foreign official sector is selling Treasuries. Stephen Jones at Aegon Asset Management called it “stocking the war chest” — reserve managers cashing out their most liquid dollar assets. Brad Setser of the Council on Foreign Relations argued the motive is straightforward: countries paying higher dollar-priced energy bills reach for the fastest source of dollar liquidity available, and Treasuries are it.
The 10-year Treasury yield rose 35 basis points in March — its biggest monthly jump since President Trump returned to the White House. Auctions for 2-, 5-, and 7-year notes drew weak demand last week. The government must refinance $10 trillion in maturing debt over the next 12 months while running a deficit on pace to hit $2 trillion and absorbing a Pentagon request for $200 billion in supplemental war funding.
The fracture was visible even before the first strike. Treasury International Capital data for January 2026, released March 18, showed private foreign investors running net outflows of $76.1 billion while foreign official institutions posted net inflows of $51.1 billion — private capital retreating a full month before the war started, while central banks were still buying. The divergence suggests structural erosion in private demand was already accelerating on its own.
The war’s full impact on foreign ownership remains unmeasured. February 2026 TIC data — the first official read covering the Hormuz closure and the emergency central bank selling — is due April 15.
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