OpinionMay 29, 2026

Who's Going to Buy All These Bonds? The Petrodollar Question Has Moved to the Treasury Market

Foreign central banks are trimming U.S. Treasuries as debt nears $39T. The real de-dollarization story isn't in oil — it's in the bond market. What it means for you.

By the TradeRoom Live Editorial TeamReviewed May 29, 2026
This page contains affiliate links. If you purchase through our links, we may earn a commission at no extra cost to you.

Who's Going to Buy All These Bonds? The Petrodollar Question Has Moved to the Treasury Market

Key takeaways

Foreign demand for U.S. Treasuries is declining at the same time the U.S. government is issuing record amounts of debt. In March 2026 alone, foreign holders sold a net $138 billion of Treasuries. Japan and China led the selling.

The marginal buyer of U.S. government bonds is shifting from price-insensitive foreign central banks to price-sensitive private investors and stablecoin issuers. This handoff is pushing yields higher.

With gross federal debt approaching $39 trillion and annual interest costs exceeding $1 trillion, the most likely long-term outcome is not default but a gradual loss of purchasing power through higher inflation and financial repression.

The relevant signal is no longer the oil price. It is the behavior at Treasury auctions.

A follow-up. Two years ago I argued that the death of the petrodollar was wildly overstated — but that, combined with the weaponization of the dollar, it might mark "the beginning of the end." Here's where we actually are now. The story didn't play out in the oil market. It's playing out in the bond market.

When I wrote about the petrodollar back in 2024, the sensational headline was that Saudi Arabia had "let the deal expire" and that oil would soon be priced in yuan, rubles, and a shiny new BRICS currency. I pushed back on that — it was a non-binding handshake, never a treaty, with no expiration date — while flagging the part that was real: the slow erosion of the system that recycled the world's oil money into U.S. Treasury bonds.

That second point is the one that matters today. Because the petrodollar was never really about oil. It was about demand for U.S. government debt. Every barrel sold in dollars created a buyer for Treasuries. Strip that engine down, and you're left with a single uncomfortable question that now hangs over the entire global financial system:

Who is going to buy all the bonds America needs to sell?

In 2026, that question stopped being theoretical.

Bond market stress

The clearest signal is currently in the Treasury market rather than equities.

The 30-year U.S. Treasury yield reached 5.2% in May, its highest level since 2007. The 10-year yield, which was below 4% before the Iran conflict began in late February, rose to a 16-month high of 4.7% on May 20 before easing to around 4.45% later in the month.

When yields rise, bond prices fall. Investors holding long-term Treasuries experienced losses during this period.

Similar pressures appeared in other developed markets. The UK’s 30-year gilt yield reached its highest level since 1998, and Japan’s 30-year yield also hit a record. Across developed economies, investors are demanding higher compensation to lend to governments. This rise in the term premium reflects concerns about persistent inflation and the large volume of government debt that needs to be financed.

Some analysts attribute part of the pressure to domestic factors. Big Tech companies have borrowed and spent over $700 billion on AI data centers, increasing competition for capital. Regardless of the relative weight given to geopolitical versus domestic drivers, the result is the same: borrowing costs have risen for governments and private borrowers alike.

Oil prices and bond yields

Higher oil prices are adding to inflationary pressure. The Strait of Hormuz, which carries roughly a fifth of global oil supply, has been effectively closed since early March. The IEA described this as the largest oil supply disruption in market history. Brent crude rose to around $138 a barrel in early April before falling back toward $97 in late May.

The U.S. Energy Information Administration expects Brent to average around $106 through May and June. Higher oil prices feed directly into headline inflation, which supports a higher inflation premium in bond yields. This keeps borrowing costs elevated. Energy prices and government bond yields are closely linked at present.

Japan and China reduce Treasury holdings

In March 2026, foreign holders sold a net $138 billion of U.S. Treasuries. Japan and China, the two largest foreign holders, led the selling.

  • Japan, still the largest foreign holder, reduced its holdings by nearly 4% to about $1.19 trillion, selling roughly $48 billion.
  • China cut its holdings by about 6% to roughly $652 billion — its lowest level since 2008 and down more than 14% since the start of 2025.

The reasons differ. Japan sold Treasuries primarily to defend its currency after the yen weakened past 160, partly due to higher oil import costs. The Bank of Japan intervened in March and April, and Treasury sales provided funding.

China’s reduction appears more strategic. It reflects an ongoing effort to diversify reserves and reduce exposure to a financial system that can be restricted, as demonstrated by the freezing of Russian assets in 2022.

The Dollar Index has declined from as high as 113 in late 2022 to around 99, marking its weakest annual performance in eight years.

The shift in Treasury buyers

Other buyers have stepped in to offset the foreign selling. In the same March data, the United Kingdom — the main custody center for hedge funds and global investors — added nearly $30 billion. Germany and the Cayman Islands also increased their holdings. On a transaction basis, net capital flowed into the U.S.

A newer source of demand has also appeared: dollar stablecoin issuers. Tether reported holding over $120 billion in Treasury bills at the end of 2025, and Circle added roughly $21 billion. These represent a fast-growing, price-sensitive buyer that did not exist at this scale a few years ago.

The key development is not the disappearance of buyers but a change in who they are. For decades, the marginal buyer was often a foreign central bank purchasing for reserve or trade reasons with little sensitivity to price. Increasingly, the marginal buyer is a private investor, hedge fund, or money manager who demands higher yields to accept the risk. This shift from price-insensitive to price-sensitive demand is a major factor behind the rise in the term premium. The bonds continue to sell, but the U.S. must pay more to issue them.

The buyer handoff in U.S. Treasuries March 2026: net foreign −$138B — but the buyer is changing, not vanishing Official money — retreating price-insensitive: reserves & trade Japan −$48B → $1.19T (still #1) China ≈ −6% → $652B (18-yr low) Selling to defend FX & de-risk the dollar Private money — stepping in price-sensitive: wants a fat yield UK custody hub +$30B Hedge funds & money managers Stablecoins: Tether $120B+, Circle +$21B → handoff The bonds still get sold — America just pays up. A rising term premium on ~$39T of debt is the price of the handoff.
For decades the marginal Treasury buyer was a price-insensitive central bank. Increasingly it's a yield-hungry private investor — which is exactly why borrowing costs keep climbing.

Developments in de-dollarization

Some concrete steps toward reducing reliance on the dollar have occurred. Indian refiners are purchasing Russian crude settled in Chinese yuan and UAE dirhams. Iran has begun charging yuan-denominated tolls for tankers passing through the Strait of Hormuz. BRICS has expanded to 11 nations, including Saudi Arabia, the UAE, and Iran, and is developing alternative payment systems such as the mBridge platform and China’s CIPS network, both of which bypass SWIFT and U.S. oversight.

However, the more dramatic predictions have not materialized. The dollar still accounts for roughly 57–60% of global reserves. India’s foreign minister has stated there is no proposal for a BRICS currency and that India has never supported de-dollarization. Saudi Arabia has joined BRICS and mBridge while continuing to recycle petrodollars into Treasuries. The proposed gold-and-currency-basket unit for BRICS has not been launched.

The changes are occurring gradually and are appearing more clearly in reserve asset choices than in trade settlement.

Central bank gold buying

Foreign central banks have been increasing their gold reserves. They have purchased more than 1,000 tonnes annually for three consecutive years, including approximately 850 tonnes in 2025 — the 16th straight year of net buying.

According to the World Gold Council’s 2026 survey, 68% of central banks plan to add to their gold holdings this year, up from 62%. Geopolitics is the most frequently cited reason. China, Poland, Türkiye, and India have been among the largest buyers.

The 2022 freezing of roughly $300 billion in Russian reserves demonstrated that foreign bond and deposit holdings can be restricted, while gold held domestically cannot. France repatriated 129 tonnes from the New York Fed to Paris for this reason.

BRICS+ nations now hold an estimated 17.4% of global gold reserves, up from 11.2% in 2019. Gold prices exceeded $5,000 per ounce during 2026.

Default risk and fiscal dominance

An outright U.S. default is highly unlikely. The government borrows in its own currency and can create dollars to meet payments. The real risk lies in how the debt is managed and what that does to the purchasing power of the dollar.

Gross federal debt is approaching $39 trillion. Debt held by the public has exceeded the size of the entire U.S. economy for the first time since World War II. Net interest payments are expected to reach roughly $1 trillion this fiscal year — more than defense spending and second only to Social Security. The Congressional Budget Office projects another $25 trillion in borrowing over the next decade, with about $16 trillion of that going toward interest alone. By 2036, interest payments plus Social Security, Medicare, and Medicaid are projected to consume 100% of federal revenue.

The relationship between demand for Treasuries, yields, and deficits can become self-reinforcing: weaker demand pushes yields higher, which raises interest costs, widens deficits, and requires more bond issuance. This dynamic is what the bond market is increasingly reflecting.

A sudden crisis — such as a failed auction or sharp collapse in bond prices — remains a tail risk rather than the base case. The more probable path is a gradual process economists call fiscal dominance, in which debt management takes priority over other policy goals, including price stability. 2026 marks an early stage of this pressure rather than an immediate crisis.

The debt doom loop Why softer demand for Treasuries feeds on itself Demand for Treasuries softens Yields rise (bond prices fall) Deficits widen → more bonds to sell Interest costs climb (~$1 trillion a year) ⟳ doom loop
An outright default isn't the base case — but this self-reinforcing spiral is what the bond market is beginning to price in.

Monetary policy under the new Fed chair

Kevin Warsh was sworn in as Chair of the Federal Reserve on May 22, 2026, following the most divisive confirmation vote in the central bank’s history. His reputation is that of a balance-sheet hawk. He served on the Fed during the 2008 crisis, publicly opposed quantitative easing at the time, and resigned in 2011 over concerns about the long-term inflation risks of large-scale bond purchases. He has consistently argued that the central bank’s primary role is price stability rather than financing the Treasury.

Warsh has signaled plans to reduce the Fed’s balance sheet and remove the market’s assumption that the central bank will always intervene to support asset prices.

At the same time, he faces significant political pressure to lower interest rates while overseeing a debt level that creates strong incentives for inflation. This combination of hawkish views and a large fiscal burden creates a tension that markets have not yet fully priced in. Direct money creation on a large scale is unlikely. More subtle tools are the more probable approach.

Five ways governments have reduced high debt

History shows five main channels that countries have used to bring down their debt-to-GDP ratio. The United States has used some of these approaches since World War II. The options are not equally realistic in the current environment.

Five ways out of a debt hole Reinhart & Sbrancia's channels — and which are realistic for the U.S. Grow out of it growth rate beats the interest rate (AI is the bet) The hope Austerity cut spending, raise taxes, run a surplus Radioactive Default won't happen — it prints its own currency Off the table Inflation let it run hot to erode the debt's real value Likely Repression herd captive buyers; cap yields below inflation Likely
The honest forecast is a cocktail — growth (the hope), tolerated inflation (likely), and financial repression (likely). All but the first quietly transfer wealth away from savers and bondholders.

  1. Grow out of it. If the economy’s nominal growth rate exceeds the interest rate on the debt, the debt burden shrinks over time without requiring austerity or inflation. This is how the U.S. reduced its debt ratio after World War II. It is the least painful option but difficult to achieve reliably. Current policy bets on AI-driven productivity growth to help deliver this outcome.

  2. Austerity. Cut government spending and/or raise taxes to run a budget surplus. This approach has worked in some cases but is politically difficult and can slow economic growth.

  3. Default or restructure. Reduce the debt through non-payment or renegotiation. For a country that borrows in its own currency, this option carries severe costs and is generally avoided.

  4. Inflation. Allow inflation to rise so that the real value of the existing debt declines. Lenders are repaid in dollars with lower purchasing power. This functions as a tax on holders of cash and fixed-income assets.

  5. Financial repression. Use regulations and policies to direct savings into government bonds while keeping interest rates below the rate of inflation. This has been used historically to reduce debt burdens over time and also transfers value from savers to the government.

The most probable outcome is a combination of growth, higher inflation, and elements of financial repression rather than any single channel.

Implications for investors

The most likely outcome is not a sudden default but a gradual erosion of purchasing power through a combination of higher inflation and financial repression, even while headline economic figures remain stable.

In this environment, long-dated bonds and cash are likely to deliver negative real returns over time. Assets that have historically performed better include real assets, equities, shorter-duration and inflation-linked bonds, and gold. This shift in preferences is already visible in central bank reserve management.

The decline in the petrodollar system is occurring gradually rather than through a single dramatic event. The clearest signals are appearing in the Treasury market rather than in oil prices.

Stay locked in...

/Kimere

This article is market commentary for educational purposes and is not investment, tax, or financial advice. It does not account for your individual circumstances and is not a recommendation to buy or sell any security or asset. Markets carry risk, including the loss of principal. Do your own research and consider consulting a licensed financial professional before making investment decisions.

Sources

Share this on X →

More Articles