The virtuous loop that has seen America underwrite stability in the Middle East in exchange for Gulf states recycling their dollar revenues into US Treasuries has been broken.
The understanding traces back to 1974, when Henry Kissinger struck one of the most consequential financial deals in modern history. Saudi Arabia would price its oil in dollars and park the surpluses in US assets — Treasuries above all. Other Gulf states followed. In exchange, America provided security guarantees and a stable global order.
The US-Israeli war with Iran has fractured this arrangement — at both ends.
Start with the importing side. Since the strike on Iran on Feb. 28, foreign central banks have been net sellers of Treasuries for five consecutive weeks. Holdings at the Federal Reserve Bank of New York have dropped by roughly $82 billion to $2.7 trillion, the lowest level since 2012.
The 10-year Treasury yield, rather than falling on safe-haven demand as it has in every major recent crisis, climbed from 3.9% at the end of February to above 4.4% within weeks. The rates desk at Bank of America Corp. offered a dry summary: “Foreign official sectors are selling US Treasury bonds.”
The mechanism is straightforward. Turkey, India, Thailand and other oil-importing nations are caught in a brutal arithmetic: Oil priced in dollars has surged past $100 a barrel while their currencies weaken against the greenback. To limit depreciation — which would push domestic oil prices even higher, forcing either fiscal subsidies or household pain — central banks intervene in currency markets. That requires dollars. The most liquid dollar asset any central bank holds is Treasuries. So they sell.
The petrodollar loop requires two moving parts: dollars earned and dollars invested. Both have stopped.
The numbers on the exporting side make this concrete. Kuwait, Saudi Arabia and the UAE had a combined holding of about $300 billion in Treasuries as of January. These countries are now simultaneously earning less oil revenue, spending heavily on air defense and reviewing the investment pledges they made to Washington just months ago. A Gulf official told the Financial Times that several of the region’s largest economies are examining whether force majeure clauses apply to existing investment commitments, including to the US. Gulf sovereign wealth funds are big investors in US assets. The direction of travel is now uncertain in a way it has not been in decades.
There is a longer structural story that the war is accelerating rather than creating. The share of Treasuries held by foreign investors had already fallen to around 32%, down from half in the early 2010s. Central banks became net sellers in early 2025. For the first time since 1996, global central banks now hold more gold in aggregate than US government bonds. These were slow-moving trends, easy to dismiss as noise. The Iran war is making them look like signal.
The standard reassurance is that there is no alternative to Treasuries — no other market offers the depth, liquidity and legal infrastructure that central banks require. This remains true. Foreign central banks will not abandon Treasuries wholesale. But “no realistic alternative” and “unquestioned safe haven” are not the same thing, and the Iran war is clarifying the difference.