Signal
Foreign central bank custody holdings at the New York Fed have dropped by $82 billion over the past six weeks — the lowest level since 2012, according to Brad Setser’s tracking data. The 10-year Treasury yield has moved from roughly 3.9% in late February to 4.4% last week, a nearly 50bp swing. This is not a single event. It is the cumulative result of three separate pressures converging on the same asset class.
The Selling Is Rational — That’s the Problem
Start with the most mechanical explanation. Oil is at $105. Import-dependent countries — Turkey, India, Thailand — need dollars to pay for crude. The fastest way to get dollars is to sell Treasuries. These same countries are also defending their currencies, because a weaker lira or rupee makes dollar-denominated oil even more expensive for their citizens. So they sell Treasuries twice: once for oil, once for FX intervention.
This is not a panic. It is arithmetic. But rational selling still moves prices, and the cumulative effect of dozens of central banks running the same playbook at the same time is anything but trivial.
Chokepoints in Reverse
Edward Fishman’s Chokepoints lays out a core paradox of American financial power: the dollar system is strong because everyone uses it, but every time Washington weaponizes that system — sanctions, asset freezes, secondary sanctions — it gives the rest of the world one more reason to diversify away.
This used to be a slow variable. It is speeding up.
The tariff war pushed China into a corner. Beijing’s response was not tit-for-tat tariffs. It was targeting America’s own chokepoint: rare earth export controls on 17 critical minerals. A 145%-for-145% tariff exchange (as of April 12, per multiple sources) is a shouting match. Choking the processing chain for minerals essential to defense and semiconductor manufacturing is leverage. Washington eventually accepted a truce — because a rare earth supply disruption would hurt the military-industrial base far more than any tariff revenue could offset.
The Iran blockade follows the same logic. The U.S. naval blockade nominally targets ships entering and leaving Iranian ports. But global shipping insurance runs through London and New York. Any shipowner who might brush against secondary sanctions reroutes. The effective reach of the blockade extends far beyond the physical perimeter.
Each use of this power is individually justified. Collectively, they are teaching the world a lesson Washington did not intend: holding dollar assets means holding exposure to American policy decisions you cannot predict or influence.
Three Lines, One Loop
Zoom out and lay the timelines flat.
Line one: tariffs. From “Liberation Day” in April 2025 to the present, U.S.-China tariff policy has been a series of escalations, pauses, and re-escalations. In the week following Liberation Day alone, the 10Y yield jumped 34bp (CFR data). The market was not pricing inflation. It was pricing unpredictability.
Line two: the Iran blockade. Oil at $105 forces passive Treasury selling across the developing world. Passive or not, the bond market does not care about your motivation — it only sees the flow.
Line three: refinancing pressure. The U.S. has approximately $10 trillion in Treasuries maturing and needing to roll in 2026 (Fortune data). Recent 2-year, 5-year, and 7-year auctions have shown notably weak demand. The MOVE index has spiked into territory that signals price instability. Borrowing at scale while the buyer base is shrinking leaves yields with only one direction to go.
Separately, none of these are fatal. Together, they form a self-reinforcing loop: policy uncertainty raises the risk premium, which raises yields, which raises borrowing costs, which increases fiscal pressure, which makes policy even less predictable.
The Bear Case for the Bear Case
Treasury-collapse narratives are perennial. They are also, so far, perennially wrong. The counter-arguments deserve a hearing.
The $29 trillion pool has no substitute. European sovereign debt is fragmented. Japanese yields are too low. Chinese bonds are not freely convertible. De-dollarization has been a talking point for a decade. The dollar’s share of global reserves has drifted from 65% in 2015 to roughly 58% today — a real decline, but no single currency is positioned to absorb the difference.
Central bank selling is oil-driven, not ideological. Most of the current selling is a mechanical response to energy prices, not a strategic pivot. If oil falls, the selling pressure eases.
The Fed has a backstop. If yields spiral, the Federal Reserve can reintroduce some form of bond-buying program. The 2023 Bank Term Funding Program during the SVB crisis is a recent precedent.
All true. But “not collapsing” is not the same as “fine.” The real change is at the margin. Each round of sanctions, each tariff reversal, each blockade adds another straw to the camel’s back. The straws do not always break anything. The back is bending.
What to Watch
The following is an observational framework, not a trade signal.
- Can the 10Y yield return below 4.2%? If the blockade persists and the tariff war continues, 4.4% may be a waypoint, not a ceiling.
- Indirect bid ratios at upcoming Treasury auctions. This is the most reliable thermometer for real foreign central bank demand — more honest than any analyst commentary.
- Gold-dollar decoupling. Normally, a strong dollar means weak gold. If gold surges while the dollar holds steady, it signals that central banks are hedging dollar credit risk with physical metal. This pattern has already appeared in 2024-2025.
- China’s rare earth card. If Beijing reactivates mineral export controls after the current truce expires, the chokepoint logic intensifies further.
Data sources include New York Fed custody data (Brad Setser tracking), CFR, Fortune, and Edward Fishman’s Chokepoints.