Treasury yields hit 4.62% as foreign central banks liquidate holdings to defend currencies from oil shock. China at 2008 low, Japan cuts $47B.
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The 10-year US Treasury yield climbed back to 4.62% this week, a level not seen in more than a year. The move is not solely about inflation expectations or Federal Reserve policy. A second driver is emerging: forced liquidation of Treasuries by foreign central banks defending currencies against the global energy shock.
Foreign governments sharply reduced Treasury holdings in March. The Middle East conflict forced central banks to defend weakening local currencies against surging energy prices. China cut its holdings to USD 652.3B, the lowest level since September 2008. Japan, the largest foreign holder of US debt, reduced holdings by roughly USD 47B to USD 1.191T. Overall foreign holdings declined from USD 9.49T in February to USD 9.25T in March. The liquidation created a significant supply-demand imbalance in the Treasury market, directly contributing to rising yields.
The mechanics of the move are creating a vicious feedback loop. Central banks sell Treasuries to raise Dollars and stabilize domestic currencies weakened by the oil shock. Higher Treasury yields simultaneously strengthen the Dollar further. That increases depreciation pressure on those same currencies and potentially forces additional reserve liquidation. In effect, the Treasury market is no longer reacting solely to inflation expectations or Fed policy. It is increasingly reflecting global liquidity stress and balance sheet pressures across the international financial system.
Oil prices remain elevated despite temporary diplomatic relief headlines. Brent crude briefly pulled back after US President Donald Trump announced he was postponing a planned strike on Iran at the request of Gulf allies including Saudi Arabia, the UAE, and Qatar. The decline proved shallow. The underlying drivers keeping energy markets tight remain firmly in place. The Strait of Hormuz remains effectively blocked. Commercial inventories are critically low. The broader geopolitical standoff continues unresolved.
Reports suggest the latest Iranian proposal sent to Washington through Pakistan did little to alter the underlying impasse. Iran reportedly focused its framework on separating the war and maritime blockade issues from the nuclear negotiations. It prioritized immediate economic and military relief while delaying the core nuclear questions. For Trump and his national security team, including Defense Secretary Pete Hegseth, sidelining the nuclear issue appears unacceptable. That reinforces market expectations that tensions may persist rather than de-escalate meaningfully.
In currency markets, the Dollar is the strongest major currency of the day so far. It is supported by rising yields and persistent global uncertainty. Sterling and Yen also outperformed. The Yen benefited from its safe-haven status and Japan's Q1 GDP beat, which showed the economy entered the energy shock period with some buffers. Sterling softened slightly after UK payrolls fell sharply and unemployment rose to 5.0%, reinforcing the case for BoE patience. With oil prices climbing again, tomorrow's UK inflation data could quickly reshape the outlook.
Aussie and Kiwi lagged amid weaker risk sentiment and renewed concerns about China's slowdown. AUD/CAD reversed lower this week. Weak Chinese data, renewed risk-off sentiment, and fading expectations for a fourth straight RBA rate hike undermined the Aussie. Rising oil prices continued boosting the Canadian Dollar. Technical signals now suggest a possible medium-term top may already be forming near parity. The RBA is underperforming as higher global yields reduced demand for low-yielding safe havens. Euro and Canadian Dollar traded more neutrally in the middle of the pack.
Canada's inflation rate accelerated to 2.8% in April as gasoline prices surged nearly 29%. Softer core inflation measures suggest underlying price pressures remain more contained than headline data imply. The divergence matters for the Bank of Canada policy path. If core inflation stays subdued, the BoC may hold rates steady even as headline prints run hot. That dynamic keeps the Canadian Dollar supported by oil limits the upside from rate expectations. Read more on Canada CPI.
The AUD/CAD pair reversed lower this week. It reflects the divergence between a commodity currency tied to China demand and one tied to oil. With the Strait of Hormuz blockade persisting, oil prices are likely to remain elevated, favoring CAD over AUD. The RBA's shift into a tactical wait-and-see phase, as shown in the minutes, further weakens the Aussie's yield advantage.
UK payroll employment fell again in April while unemployment rose to 5.0% in the three months to March. That signals softer labor market conditions. Wage growth remained firm enough to keep inflation concerns alive for the Bank of England. The data reinforces the case for BoE patience. The next catalyst is tomorrow's UK CPI print. If inflation surprises to the upside, the BoE may need to resume tightening, which would support Sterling. If inflation eases, the labor market weakness could accelerate rate cut bets.
Traders should watch UK CPI closely. The oil shock is feeding through to gasoline prices, and the UK is particularly exposed to energy costs. A hot print would validate the BoE's cautious stance and could push GBP/USD higher. A miss would open the door for a more dovish repricing. Track GBP/USD levels.
Attention now turns to whether equity markets can continue absorbing the rise in global yields without a broader risk-off break. The next major move in stocks may depend more on geopolitics directly and less on whether corporate earnings can continue justifying valuations in a world where Treasury yields are rapidly moving back toward cycle highs. For forex traders, the feedback loop between Treasury liquidation, Dollar strength, and oil prices remains the dominant transmission channel. The next scheduled data points – UK CPI, US durable goods, and any diplomatic developments on Iran – will determine whether the loop tightens or breaks.
For a broader view of how these forces interact across currencies, see our forex market analysis.
Prepared with AlphaScala research tooling and grounded in primary market data: live prices, fundamentals, SEC filings, hedge-fund holdings, and insider activity. Each story is checked against AlphaScala publishing rules before release. Educational coverage, not personalized advice.