Bloomberg: The petrodollar is dead, something burns paper The "virtuous circle" that once allowed the United States to exchange the stability of the Middle East for the Gulf countries to invest their dollar income in US treasury bond bonds cyclically has broken. This arrangement can be traced back to 1974, when Henry Kissinger facilitated one of the most influential financial agreements in modern history. Saudi Arabia agreed to price its oil in dollars and invest its surplus in US assets, mainly US treasury bond bonds. Other Gulf countries have followed suit. In exchange, the United States provides security guarantees and a stable global order. The cyclical nature of this arrangement can be described as elegant: oil consuming countries purchase energy in US dollars, which flow to Riyadh and Abu Dhabi, and then back to the debt market in Washington. For 50 years, this petrodollar cycle has silently subsidized the borrowing costs of the United States and consolidated the position of the US dollar as a global reserve currency. Now, the war between the United States and Israel against Iran has broken this arrangement from both ends simultaneously. Let's first look at the import end. Since the attack on Iran on February 28, foreign central banks have sold US treasury bond bonds for five consecutive weeks. The size of treasury bond held by the New York Federal Reserve has decreased by about $82 billion to $2.7 trillion, the lowest level since 2012. Instead of falling due to the demand for safe haven in every major crisis in the past, the yield of 10-year US treasury bond bonds climbed from 3.9% at the end of February to more than 4.4% in a few weeks. Bank of America's interest rate trading department gave a brief summary: "Foreign official departments are selling US treasury bond bonds." The mechanism is very simple. Türkiye, India, Thailand and other oil importing countries are in a cruel arithmetic dilemma: the price of oil denominated in dollars has soared to more than $100 per barrel, while their local currencies have depreciated significantly against the dollar. In order to curb currency depreciation, which will further push up domestic oil prices and force governments to either provide fiscal subsidies or cause pain to the public, central banks of various countries have to intervene in the foreign exchange market. This requires US dollars. The most liquid dollar asset held by central banks is US treasury bond bonds. So they chose to sell. This is not without precedent. During the COVID-19 scare in March 2020, foreign central banks sold a record $109 billion of US treasury bond. But that incident was quickly resolved. The Federal Reserve has activated the US dollar swap line, and the market has returned to calm, with funds flowing back within a few weeks. Although the instinct to avoid risks has been temporarily disrupted, the structural foundation remains intact. Every major crisis since then - Russia's invasion of Ukraine, China's military pressure on Taiwan in August 2022, the collapse of the Silicon Valley Bank in March 2023, and the Hamas attack on Israel on October 7, 2023- has led to the inflow of funds into the US treasury bond, rather than outflow. The yield has decreased, and the original script has been repeatedly tested. Now let's take a look at the rhetoric - and why this Iran war is completely different from all the events mentioned above. In a normal oil shock, rising oil prices will bring higher income to Gulf producing countries. Petrodollars will re flow into dollar denominated assets, including US treasury bond bonds. Historically, high oil prices have supported the treasury bond market. Because shocks themselves create surpluses, and surpluses generate demand for treasury bond. This time, the Gulf producing countries were unable to transport the oil out. The Strait of Hormuz is blocked, trapping not only oil tankers from other countries but also their own oil. Gulf countries including Kuwait, Iraq, Saudi Arabia, and the United Arab Emirates collectively reduced their oil production by at least 10 million barrels per day in March. Saudi Arabia and the United Arab Emirates can partially reduce their production through alternative pipeline exports, but these pipelines can only handle about a quarter of the normal throughput of the Strait of Hormuz when operating at full capacity, and are currently facing direct threats from Iranian drones and missiles. Qatar has announced the activation of force majeure clauses on its liquefied natural gas exports following the attack on its Ras Laffan facility. The economic model of the Gulf Cooperation Council (GCC) - exporting hydrocarbons and then recycling the income to invest in global assets - has actually stagnated. The petrodollar cycle requires two key steps: earning dollars and investing dollars. Now both have stopped. The numbers on the export side make this reality concrete. Kuwait, Saudi Arabia and the United Arab Emirates held about $300 billion of US treasury bond bonds as of January. These countries are currently experiencing a significant reduction in oil revenues while also having to spend heavily on air defense. At the same time, they are re evaluating their investment commitments made to Washington a few months ago. A Gulf official told the Financial Times that several major economies in the region are studying whether existing investment commitments, including those to the United States, would be subject to force majeure clauses. The Gulf sovereign wealth fund is an important investor in US assets, and its investment direction is now facing unprecedented uncertainty in decades. This war is accelerating a longer-term structural transformation, rather than creating it out of thin air. The proportion of US treasury bond bonds held by foreign investors has dropped from about 50% in the early 2010's to about 32% at present. Central banks have become net sellers of US treasury bond bonds since the beginning of 2025. Since 1996, the total amount of gold held by central banks worldwide has exceeded their holdings of US government bonds for the first time. These were originally slow evolving trends that could easily be seen as noise. And the Iran War is making them a clear signal. The standard consolation is that there is no substitute for US treasury bond bonds - no other market can provide the depth, liquidity and legal infrastructure required by the central bank. This still holds true. Foreign central banks will not abandon US treasury bond bonds on a large scale. But 'no viable alternative' and 'unquestionable safe haven' are not the same thing, and this Iran war is clearly revealing the difference between the two. Safe haven trading has always been based on a political premise: that in global crises, the United States is a stabilizing force or observer, rather than a participant. But when the United States becomes a belligerent, when the conflict is to some extent a war of the United States, driving oil price shocks, tense Gulf relations, and causing bond investors to worry about the US budget deficit due to fiscal pressure, this equation changes. Not a complete change, nor a permanent change, but it is already evident enough. The agreement reached by Kissinger in 1974 went through the Cold War, Gulf War, financial crisis, and pandemic, but it did not survive this time. The petrodollar cycle has always been a political arrangement disguised as finance. Nowadays, politics has changed and finance has followed suit.