Foreign governments sharply reduced their holdings of U.S. Treasurys in March as the widening Middle East conflict triggered a wave of currency market intervention and renewed fears over global inflation. Rising oil prices, driven by escalating tensions between the United States and Iran, placed heavy pressure on import-dependent economies across Asia, forcing several central banks to tap their dollar reserves to stabilize weakening local currencies.

According to data released by the U.S. Treasury Department, China cut its Treasury holdings to $652.3 billion, marking its lowest level since 2008. Japan, still the largest foreign holder of U.S. government debt, also reduced its position significantly, lowering its holdings to $1.19 trillion. Combined foreign ownership of Treasurys fell from $9.49 trillion in February to $9.25 trillion in March, reflecting one of the sharpest monthly declines in recent years.

The selloff coincided with a surge in crude oil prices after shipping disruptions in the Strait of Hormuz reignited concerns over global energy supply. Asian currencies, particularly the Japanese yen, faced intense downward pressure as higher oil import costs widened trade deficits and fueled fears of persistent inflation. Policymakers across the region responded by intervening in foreign exchange markets, selling portions of their U.S. Treasury portfolios to raise dollars and support domestic currencies.

Analysts said the move highlights how geopolitical shocks are increasingly spilling into global bond markets. Rising Treasury yields and falling bond prices have already intensified volatility this year, with investors demanding higher compensation to hold U.S. debt amid inflation risks linked to energy prices. The sharp repricing also created valuation losses for foreign reserve managers holding long-duration Treasurys.

Despite the broad retreat, the United Kingdom increased its Treasury holdings during the month, adding nearly $30 billion as some investors sought relative stability in dollar assets. Meanwhile, attention remains focused on whether Asian central banks will continue liquidating Treasurys if oil prices remain elevated and currency pressures persist.

Market participants are now closely watching the next round of Treasury data for signs of deeper reserve diversification and more aggressive intervention activity. With the yen hovering near historically sensitive levels and oil prices remaining volatile, concerns are growing that further liquidation of U.S. debt by foreign governments could add pressure to an already fragile bond market.

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