Goldman: Iran War Dollar Surge Drove Foreign Central Banks to Sell US Treasuries

The Quick Take

• A stronger dollar during the first month of the US-Iran conflict drove foreign official institutions to sell US Treasuries, per Goldman Sachs
• The dollar's safe-haven surge made it less attractive for foreign central banks to recycle surpluses back into US government bonds
• The dynamic adds to existing fiscal pressure on Treasury supply absorption as the US deficit remains elevated

A stronger dollar in the initial phase of the US-Iran conflict prompted foreign official institutions — including sovereign wealth funds and central banks — to sell US Treasury bonds, reducing demand for government debt at a sensitive fiscal moment, according to Goldman Sachs. The dollar's safe-haven surge made it less attractive for foreign reserve managers to recycle current account surpluses back into dollar-denominated assets.

Foreign official selling of Treasuries during dollar rallies is a well-documented structural pattern, but the scale and persistence matter. If the dollar strengthens sharply and sustains, cumulative offloading from foreign reserve managers can push yields higher independent of Federal Reserve policy. This compounds existing US fiscal deficit dynamics, as primary dealers and domestic institutional buyers must absorb the supply shift — raising the question of whether term premium must reprice higher.

Watch 10-year Treasury auction bid-to-cover ratios over the next two months as a proxy for demand resilience from official sector buyers. A fall below 2.3x would signal buyers are demanding more yield to absorb supply. The critical macro variable: whether the US-Iran conflict extends beyond six months, prolonging the dollar strength that deters foreign recycling of reserves into Treasuries and keeps upward yield pressure in place.

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