(Bloomberg) -- Foreign investors reduced their holdings of Chinese government bonds by the most ever last month as Russia’s invasion of Ukraine roiled fixed-income markets worldwide. 

Overseas investors sold a net 35 billion yuan ($5.5 billion) of Chinese government bonds in February, marking the largest monthly cut on record and the first reduction since March 2021, according to data compiled by Bloomberg. Their holdings fell to 2.48 trillion yuan from a record 2.52 trillion in January. 

The scale of the pullback raised speculation that some of the selling may have come from Russia as sanctions from the U.S. and European Union cut off the Russian central bank’s access to much of its $643 billion in foreign reserves. As of June, China’s yuan accounted for 13% of those reserves, according to the central bank data. Analysts at Australia & New Zealand Banking Group estimated that Russia’s central bank and sovereign wealth fund probably own a combined $140 billion of Chinese bonds.

The exodus from the Chinese bonds likely also reflects selling by fixed-income funds that needed to raise cash to meet clients’ redemptions amid the surge in geopolitical risks. On Monday, Goldman Sachs Group Inc. lowered its assessment of Chinese sovereign bonds from bullish to neutral in the near term on the redemption risk. China’s narrowing yield advantage over Treasuries, a result of the policy divergence between China and the U.S., has also eroded the allure of the Chinese securities.

It’s speculation but “of course possible” that the Russian central bank sold the bonds to “generate cash,” said Rob Drijkoningen, a portfolio manager at Neuberger Berman Europe Ltd. It’s also likely the reduced yield differential “plays a big role” in the outflow, he said. 

February’s outflow marked an abrupt reversal of the recent trend. Inflows averaged 72 billion yuan a month since the end of October, when FTSE Russell added Chinese bonds to its global benchmark. In February, foreign investors also sold 28.5 billion yuan of policy bank notes.

Goldman Sachs’ analysts said China’s local bonds could be liquidated by fixed-income funds that need to raise cash. 

“If real money funds continue to face redemptions, and they cannot sell Russia, then the alternative is to sell other EM markets to raise cash,” analysts Danny Suwanapruti, Rina Jio, and Andrew Tilton wrote in a report Monday. China’s weighting in the JPMorgan Chase & Co.’s emerging-market benchmark -- the GBI-EM index -- is capped at the maximum of 10%. 

Alex Etra, a senior strategist at Exante Data, said he couldn’t rule out the possibility of the Russian central bank selling, while the repatriation flows, particularly those of European bond funds, also contributed to the outflow. He estimated that bond funds’ outflow from China to be as much as $1.5 billion over the past four weeks.

“It certainly could be Russian central bank, but we don’t have data to confirm it,” said Etra, who previously worked at the Federal Reserve of New York.

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