(Recasts, adds detail and analyst comment) SHANGHAI, April 7 (Reuters) - Foreign investors reduced their holdings of Chinese sovereign bonds in March, the first monthly drop in more than two years, as narrowing spreads over overseas debt and a weaker yuan tarnished their appeal. Overseas investors held Chinese government bonds (CGBs) worth 2.04 trillion yuan ($311.9 billion) at the end of March, down from 2.06 trillion yuan a month earlier, according to data released Wednesday by interbank market depository China Central Depository & Clearing Co (CCDC). It was the first decrease in foreign CGB holdings since February 2019, Reuters calculations showed. Holdings by offshore investors of all interbank market bonds dipped by 8.95 billion yuan in March, according to Reuters calculations using data from CCDC and the Shanghai Clearing House. That was the first monthly decline since March 2020, when global pandemic lockdowns sparked widespread market sell-offs. Logan Wright, director of China markets research at Rhodium Group in Hong Kong, said that the drop was “a bit surprising”, but noted that rising U.S. yields and the prospects for a global recovery had put pressure on China’s currency and Chinese yield premiums in March. “I think that’s ultimately what’s driving it. The prospect for the easy yield pickup is fading,” he said. The spread between the 10-year CGB yield and its U.S. equivalent narrowed by nearly 84 basis points from the end of 2020 to a more than one-year low of 145.5 basis points on March 31, according to Refinitiv data. China’s yuan slipped by nearly 1.3% against the dollar in March, its biggest monthly loss since August 2019, as the greenback rallied. BNY Mellon said earlier this month that its iFlow indicator showed “significant outflow” from CGBs for the first time since global pandemic lockdowns began last year. Analysts nevertheless expect foreign demand for Chinese bonds to remain resilient, supported by passive flows tracking global indexes. Last week, index provider FTSE Russell gave its final approval for the inclusion of CGBs in its flagship World Government Bond Index, a move expected to drive billions of dollars into Chinese bonds.