This is a long article from Japan Times- As I’d mentioned in my post from yesterday– Global use of the petro dollar is how the rest of the world props the US up– Use of the petro dollar has been in a steady decline..
Refresh your memory here
Central banks have sold Treasurys for weeks since the conflict began
The virtuous loop that has seen America underwrite stability in the Middle East in exchange for Gulf states recycling their dollar revenues into U.S. Treasurys 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 U.S. assets — Treasurys above all. Other Gulf states followed. In exchange, America provided security guarantees and a stable global order.
The arrangement was elegant in its circularity: Oil consumers paid dollars for energy, those dollars flowed to Riyadh and Abu Dhabi and from there back into Washington’s debt. For 50 years, this petrodollar loop quietly subsidized American borrowing costs and cemented the greenback’s role as the world’s reserve currency.
The U.S.-Israeli war with Iran has fractured this arrangement — at both ends.
**Start with the importing side. Following the strike on Iran on Feb. 28, foreign central banks were net sellers of Treasurys for consecutive weeks. Holdings at the Federal Reserve Bank of New York dropped by roughly $82 billion recently to $2.7 trillion, which was 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 offered a dry summary: “Foreign official sectors are selling U.S. Treasury bonds.”
The mechanism is straightforward. Turkey, India, Thailand and other oil-importing nations are caught in a brutal arithmetic: Oil priced in dollars surged past $100 a barrel at one point while their currencies weakened 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 Treasurys. So they sell.
This is not without precedent. Foreign central banks sold a record $109 billion in Treasurys during the COVID-19 panic of March 2020. But that episode resolved quickly. The Fed deployed dollar swap lines, calm returned and the money flowed back within weeks. The flight-to-quality instinct was temporarily scrambled but structurally intact.
***Now consider the exporting side — and why the Iran war is categorically different from all those episodes.
In a normal oil shock, rising prices generate rising revenues for Gulf producers. Petrodollars flow back into dollar-denominated assets, including Treasurys. High oil prices have historically been, paradoxically, supportive of the Treasury market. The shock creates the surplus that generates demand for the bonds.
This time, Gulf producers can’t get their oil out. The Strait of Hormuz closure has stranded their barrels along with everyone else’s.
Gulf states including Kuwait, Iraq, Saudi Arabia and the UAE collectively cut production by at least 10 million barrels per day in March. Saudi Arabia and the UAE can export reduced volumes through alternative pipelines. But those routes handle only about a quarter of normal Strait throughput at full capacity and they are under active Iranian drone and missile threat. Qatar declared force majeure on exports of liquefied natural gas after strikes on its Ras Laffan facility. The Gulf Cooperation Council’s economic model — export hydrocarbons, recycle into global assets — has effectively seized up.
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 Treasurys 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 U.S. Gulf sovereign wealth funds, which are big investors in U.S. 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 Treasurys 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 U.S. 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 Treasurys — no other market offers the depth, liquidity and legal infrastructure that central banks require. This remains true. Foreign central banks will not abandon Treasurys wholesale. But “no realistic alternative” and “unquestioned safe haven” are not the same thing — and the Iran war is clarifying the difference.
The flight-to-quality trade has always rested on a political premise: That in a global crisis, the United States is a stabilizer or bystander, not a combatant. But the calculus changes when the U.S. itself is the belligerent; when the conflict is partly America’s war, driving the oil shock, straining Gulf relationships and generating the fiscal pressure that has bond investors worried about U.S. budget deficits. Not completely. Not permanently. But enough.
Kissinger’s 1974 deal held through the Cold War, the Gulf Wars, the financial crisis and a pandemic. It has not survived this. The petrodollar loop was always a political arrangement dressed in financial clothing. Now that the politics have changed, the finance is following.
More on the US treasury buying up double the bonds it normally does
The U.S. Treasury is planning to buy back at least double the long-dated government bonds it usually does. Will the plan pit the Treasury secretary against both the bond markets and the Fed?
Next week, the U.S. Treasury plans to buy back at least double the number of 10-, 20- and 30-year government bonds it normally does. U.S. Treasury Secretary Scott Bessent says it’s to help markets run smoothly, but many investors are skeptical.
MA: Those are some of the reasons yields on Treasurys are high at the moment. The 30-year is at over 5%. This is a problem for the administration because the government’s debt just hit $40 trillion. The U.S. has a huge pile of debt, and high yields on Treasurys means higher borrowing costs.
WONG: High yields can also be a problem for you and me and really anyone who wants to borrow money. Because Treasurys are considered risk-free, their yields are the base for other interest rates in the economy. Take the 30-year mortgage. The interest rate for that is based on the 10-year Treasury.
MA: So these high yields pose a dilemma for Scott Bessent. What’s the Treasury secretary to do?
WONG: Well, now it is time to talk about this plan that the Treasury Department unveiled. Starting next week, it plans to at least double the size of its buyback program for longer-dated U.S. government bonds. When the Treasury Department buys back, say, 20- and 30-year bonds, it’s basically acting as an eager customer. It pumps up demand for these bonds, and that causes prices to go up and yields to come down.
MA: The problem with the Treasury Department’s plan is that Scott Bessent is not talking about lowering yields. He told CNBC that his department is doing this to improve liquidity for longer-dated bonds.
WONG: Right. So nothing to do with lowering yields and interest rates.
MA: That is what the Treasury secretary is saying. But the market’s chilly, even hostile, reaction to this buyback announcement, could be a signal that they’re not buying it.
Lastly
Saudi Aramco oil facilities hit in new strikes
Saudi Aramco’s oil facilities in the Saudi Arabian city of Jizan have been attacked only a month after a separate strike temporarily knocked out some production at its refinery.The company’s oil infrastructure was hit on Monday and the damage was being assessed, said two people with knowledge of the matter.
Jizan is the kingdom’s closest industrial city to the Yemeni border and has been attacked by the Houthis on several occasions in the past.
Jizan is home to a 400,000-barrel-per-day oil refinery, which is among the country’s largest, along with associated plants and energy infrastructure.
Saudi Aramco’s chief executive Amin Nasser said last month that the attacks had caused some interruptions to the company’s oil production but that this had no material operational or financial impact.
The latest attack was similar in scale to last month’s strike, said one of the people.
Saudi Aramco did not immediately respond to a request for information.
Oil prices climbed on Monday, with Brent crude up 1.2 per cent at $97.40 a barrel.
More refined oil products than usual were shipped from Jizan in the first few months of the US-Iran war as the conflict crimped Saudi exports from the Gulf, but volumes dropped dramatically after the Houthis restarted their attacks. No oil products were shipped from Jizan in August, according to data compiled by Kpler.
“We are back to full-time war in Yemen,” said Farea al-Muslimi, a research fellow at Chatham House. “It’s on land, in the air and on the sea . . . The Saudis are doing everything possible to avoid a direct confrontation, but they are preparing for it.”
More problems on the supply side… means more problems for the petro dollar and US Treasury Bonds