Policy signals from Washington are reigniting discussions among global bond and currency investors about the "sell America" trade. Shifts in the Federal Reserve chair's communication style, Treasury Department intervention in foreign exchange markets, combined with expanding fiscal deficits and trade war concerns, are causing a fresh wave of unease regarding US assets.
Recent developments show Fed Chair Warsh is leaning toward reducing policy communication, raising doubts about the Fed's commitment to fighting inflation. Meanwhile, according to reports, Trump has spoken with Warsh multiple times since he took office, breaking recent norms, though there is no evidence they discussed interest rates. Treasury Secretary Bessent has approved US assistance for Japan's currency intervention to support the yen, the first such coordinated action in nearly three decades, further pressuring the dollar.
These twin shocks are already reflected in market prices. The 30-year Treasury yield rose above 5%, hitting its highest level since 2007, before retreating. The Bloomberg Dollar Spot Index has fallen about 2% from its June peak, with the dollar weakening against almost all G10 currencies, a divergence that is unusual given still-high US interest rates.
Rajeev De Mello, global macro portfolio manager at Gama Asset Management, stated it is precisely this policy uncertainty that drives him to sell Treasuries and the dollar. "Bessent and Warsh represent a double blow to global markets. Investors must now price their policy risk into the dollar and Treasury curve, which is the Trump administration premium."
The "Sell America" Resurgence Differs from Last Year
The "sell America" trade first gained attention last April when Trump announced tariff measures, triggering a simultaneous sell-off in the dollar, US stocks, and Treasuries. Although that episode subsided quickly, it shook the long-held assumption that the US could indefinitely finance its widening fiscal deficit thanks to the dollar's reserve currency status and deep capital markets.
The current situation is more complex. In equities, strong tech stocks have pushed the S&P 500 to new record highs, with no full-blown market crash. Foreign holdings of US Treasuries reached $9.4 trillion by May, up 4% from a year earlier, indicating overall confidence remains.
However, some global investors in bond and currency markets are adjusting their positions. Carol Lye, a Singapore-based portfolio manager at Brandywine Global Investment Management, said her firm holds a medium-term bearish view on the dollar. "Now Bessent comes out saying the yen should be stronger, which will confirm our weak-dollar thesis." She added that the "confusing messages" from Washington are not conducive to capital inflows into the US.
Fed Credibility Questioned, Long-End Treasury Pressure Mounts
A core concern is whether the Fed can effectively anchor inflation expectations under Warsh's leadership. Analysts believe that if the Fed falls behind the curve on rate hikes, long-end yields will face further upward pressure.
Bloomberg Economics data shows the term premium on 30-year Treasuries, the extra compensation investors demand for holding long-term bonds, rose to 1.56% this week, the highest since 2013. Allianz Global Investors, managing 598 billion euros, currently favors a steepening yield curve trade, focusing on betting against five-year and seven-year bonds versus 30-year bonds.
Senior portfolio manager Ranjiv Mann stated, "The risk is that the Fed lags behind the curve in the hiking cycle. Long-end yields could become more unanchored, and the US already faces a severe fiscal challenge." Meanwhile, the Treasury raised its current-quarter borrowing estimate to $739 billion, with the market expecting continued issuance of short-term bills, adding supply pressure.
Yen Intervention Sparks Dollar Outlook Debate
The US assistance in foreign exchange intervention has prompted investors to reassess the dollar's structural outlook. Bessent defended the move on CNBC, arguing that persistent yen weakness could trigger broader currency depreciation in Asia, and Washington will do "whatever it takes" to support Japan in a way that benefits the US economy and stabilizes global markets.
The intervention was executed by buying euros and selling dollars to acquire yen, aiming to avoid directly impacting the Treasury market. Bessent described it as a "reallocation of reserves." However, market participants warn that if Japan, the largest foreign holder of US Treasuries with over $1 trillion in holdings, is forced to sell some Treasuries to fund the intervention, the ripple effects could still reach the Treasury market.
Steve Brice, global chief investment officer for wealth management at Standard Chartered, expects the dollar to fall about 3% to 4% over the next 12 months. "Government actions and other factors are gradually eroding the structural advantages of the US market."
"American Exceptionalism" Not Over, but Risks Remain
Many strategists emphasize that no one is currently predicting the end of the dollar's global reserve currency status or that Treasuries will lose their status as the global benchmark risk-free asset.
Lotfi Karoui, a multi-asset credit strategist at Pacific Investment Management Co., noted in a research report that US assets remain broadly attractive to foreign buyers, evidenced by the lack of large-scale coordinated selling. So far this year, only about 2% of trading days have seen simultaneous declines in the 10-year Treasury yield, US investment-grade corporate bond spreads, and the dollar. "If there were a true loss of faith in American exceptionalism, such coordinated selling would occur more frequently."
However, Ronald Temple, chief market strategist at Lazard, pointed out that the core risk is that foreign buyers are not keeping pace with the speed of US debt expansion. Speaking on Bloomberg Television, he said, "The confidence backdrop around US safe-asset status is changing. There are plenty of questions. The dollar's depreciation trend will re-emerge in the coming years."
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