Analysts said although Iran held a small fraction of government bonds, its initiative to ditch the falling dollar was further confirmation of diversification away from the currency and related assets.
“It’s negative for Treasuries overall because it does fit with the idea that there is a diversification away from the use of the dollar by various means,” said Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co. in New York.
Iran, the world’s fourth biggest oil producer, confirmed this week it had asked Japanese customers to pay for crude oil in yen instead of dollars, a move it said was aimed at maximizing oil export revenue. It is locked in a row with the United States over its nuclear program.
Foreign purchases of Treasuries by institutions such as central banks and oil producing countries have helped keep government bonds yields lower in recent years even as the Federal Reserve raised its benchmark overnight lending rate to 5.25 percent.
But the dollar’s poor performance has resulted in a gradual diversification in the composition of foreign central bank currency reserves.
“The proportion of money held by central banks in dollars is shrinking. It was once 70 percent and now it’s in the mid-60s. Diversification is a key theme that is negative for the dollar and Treasuries, and that has been the case this year,” said Crescenzi.
IDEAglobal currency strategist David Powell estimates Iran supplies about 15 percent of Japan’s oil imports, roughly translating into $10 billion annually and suggesting little or no impact on petrodollar flows.
“It does not have a huge implication. They probably weren’t keeping this $10 billion in Treasuries, more likely in short-term instruments. Iran is not a country that is flush with cash as other oil producing countries are,” said Powell.
U.S. government data on Tuesday showed oil exporting nations raised their Treasury holdings by $9.1 billion to $121.3 billion in May.
When British holdings, viewed as including Middle Eastern accounts using London-based accounts, are factored in, about $42.2 billion worth of petrodollars were pumped into Treasuries in May.
“That is more than four times the annual sales in oil from Iran to Japan. Iran is not leading the trend for oil producing or Middle Eastern countries as far as the data shows us,” said Powell.
