What would a coordinated sell-off of U.S. Treasuries by foreign central banks do to global interest rates and exchange rates?
Executive summary
A coordinated sell-off of U.S. Treasuries by foreign central banks would, all else equal, put upward pressure on U.S. Treasury yields and tend to weaken the dollar, but the magnitude and persistence of those moves would depend critically on who replaces that demand, the speed of selling, and policy reactions from the Federal Reserve and other central banks [1] [2] [3]. Historical and model-based studies show foreign official flows can move medium- and long-term yields measurably, yet private investors, domestic institutions, and central-bank interventions have in past episodes blunted or amplified those effects [4] [5] [6].
1. How a coordinated sell-off transmits into U.S. yields: direct supply-pressure and price impact
A large, simultaneous reduction in central-bank holdings increases net supply hitting the market and—unless matched by equivalent demand—pushes Treasury prices down and yields up; empirical estimates find official flow shocks of several tens of billions can raise 5–10 year yields by measurable basis points, implying material upward pressure if the sell-off is large and swift [1] [7]. Long-run work on reserve accumulation suggests the inverse relationship is economically meaningful: lack of foreign official buying historically would have left certain intermediate yields materially higher, illustrating how removals of that demand can move yields [4].
2. Who buys the paper matters: dealers, private buyers, and the portfolio rebalancing channel
Which counterparties step in determines the net effect—U.S. dealer banks and private investors have historically provided the marginal bid when officials reduce holdings, but capacity is finite and comes at a cost, so yields will rise until those buyers are compensated for duration and funding risk [2] [3]. Research shows dealer balance-sheet constraints and the behavior of domestic private buyers can either moderate or exacerbate price moves; during stress episodes dealers and cash-needy funds have sometimes sold into weakness rather than absorbed it [8] [9].
3. Global spillovers: higher U.S. yields push up global safe rates and re-price risk globally
Because U.S. Treasuries serve as the global safety benchmark and collateral, higher U.S. yields transmit to other sovereign bond markets and raise global borrowing costs through portfolio rebalancing and risk-premium channels, so coordinated selling by officials would likely lift long-term yields abroad as investors seek similar compensation or reallocate into other safe assets [5] [10]. At the same time, alternative reserve destinations—Bunds, gilts, Japanese government bonds, or gold—can experience price effects of their own as officials diversify, producing cross-market comovement in yields [4] [2].
4. Exchange-rate effects: dollar direction depends on motives and redeployment
Net dollar impact is ambiguous and motive-dependent: if central banks sell Treasuries to buy their own currencies to defend exchange rates, the dollar could weaken as they repatriate dollars and sell them for local currency [11] [8], but if sales are driven by de-dollarisation and a move into non-dollar assets like gold or euros, the dollar could decline too—whereas short-term safe-haven demand and dollar liquidity operations could temporarily strengthen the dollar during market stress [2] [6]. Empirical episodes show mixed outcomes because contemporaneous flows, FX interventions, and market liquidity conditions matter greatly [6] [9].
5. Market functioning, liquidity and feedback loops: when price moves become self-reinforcing
Large, rapid official sales can expose dealer funding constraints and create a Treasury-basis feedback loop where forced selling, margin calls, and reduced intermediation amplify yield moves and stress collateral markets, as occurred during March 2020 and other episodes, turning a flow shock into acute market dysfunction unless central banks or liquidity providers step in [8] [9] [1]. Policy tools—swap lines, FIMA-like facilities, or Fed purchases—can restore functioning but may also shift the fiscal/monetary burden and influence longer-run yields [1] [6].
6. Size, pace, and policy response determine the ultimate outcome; uncertainty is large
Quantitative papers estimate that $100 billion official flow shocks move mid-term yields by measurable basis points, but estimates vary with structural breaks, monetary policy regimes, and global conditions, so a coordinated sell-off could be a modest repricing if domestic and private buyers absorb it or a large shock if it coincides with constrained intermediation and weak liquidity [1] [7] [4]. Alternative viewpoints—some market participants argue officials are diversifying gradually and private demand will pick up the slack—suggest widespread wholesale dumping is less likely, but that scenario cannot be ruled out and would materially raise global interest rates and complicate exchange-rate dynamics [12] [13].