The virtuous loop that has seen America underwrite stability in the Middle East in exchange for Gulf states recycling their dollar revenues into U.S. Treasuries has been broken.

The understanding traces back to 1974, when Henry Kissinger struck one of the most consequential financial deals in modern history. Saudi Arabia would price its oil in dollars and park the surpluses in U.S. assets — Treasuries above all. Other Gulf states followed. In exchange, America provided security guarantees and a stable global order.

The arrangement was elegant in its circularity: Oil consumers paid dollars for energy, those dollars flowed to Riyadh and Abu Dhabi and from there back into Washington’s debt. For 50 years, this petrodollar loop quietly subsidized American borrowing costs and cemented the greenback’s role as the world’s reserve currency.

The U.S.-Israeli war with Iran has fractured this arrangement — at both ends.

Start with the importing side. Following the strike on Iran on Feb. 28, foreign central banks were net sellers of Treasuries for consecutive weeks. Holdings at the Federal Reserve Bank of New York dropped by roughly $82 billion recently to $2.7 trillion, which was the lowest level since 2012.

The 10-year Treasury yield, rather than falling on safe-haven demand as it has in every major recent crisis, climbed from 3.9% at the end of February to above 4.4% within weeks. The rates desk at Bank of America offered a dry summary: "Foreign official sectors are selling U.S. Treasury bonds.”

The mechanism is........

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