As the US government debt approaches the $40 trillion mark and inflation concerns persist, global capital markets are witnessing an unprecedented asset rotation. Foreign investors are losing confidence in US Treasuries and instead pouring funds into American stocks fueled by the artificial intelligence boom—a rare shift that is fundamentally reshaping the dollar's trading dynamics and the global safe-haven landscape.
An analysis of US Treasury data by Deutsche Bank reveals the magnitude of this capital flow transformation. In the year through June, international funds flowing into US equities averaged 2.8% of US GDP, surpassing the 2% allocation to government bonds. Outside of brief periods during the COVID-19 pandemic and the aftermath of the global financial crisis, this marks the first time this century that foreign buying of American stocks has exceeded purchases of US government debt.
Marija Veitmane, head of equity research at State Street, confirmed that institutional clients are displaying remarkably consistent allocation patterns, with capital increasingly favoring stocks at the expense of government bonds. Earlier this month, the fund manager of the $2.3 trillion Norwegian sovereign wealth fund proposed an aggressive plan to slash approximately $80 billion in US Treasury holdings, redirecting funds toward agency-guaranteed mortgage-backed securities instead.
George Saravelos, global head of FX research at Deutsche Bank, commented on the phenomenon: "This marks a massive shift in US asset markets—private sector balance sheets are flourishing while the public sector's balance sheet continues to deteriorate."
The mass exodus of capital stems from deep-seated concerns over the unsustainability of America's fiscal trajectory. US government debt surpassed the $40 trillion threshold last month, with fiscal deficits continuing to widen. Adding to market anxiety are political stimulus expectations. Last week, Trump pledged to distribute $5,000 "dividends" to every adult American citizen if Republicans retain control of Congress in the midterm elections—a move that could add over $1 trillion in additional fiscal costs. Treasury Secretary Bessent's announcement of a $6 billion long-term bond buyback program also failed to assuage investor disappointment.
On Monday, the rate-sensitive 10-year Treasury yield broke through the critical 5% psychological level for the first time since 2023. Meanwhile, the 30-year yield has surged from 4.83% to above 5.3% this year. With the explosive growth in issuance of similar debt instruments, investors are rapidly confronting the challenge of asset revaluation. James Turner, global head of fixed income for EMEA at BlackRock, stated bluntly that given current government deficit levels, "if this were a corporation, it could never be called a risk-free situation." Matt Rowe, senior portfolio manager at Man Group, echoed this sentiment, noting the industry has never before faced such widespread concern and debate over what "risk-free" truly means.
In stark contrast to the bond market's struggles, Wall Street traders are even disregarding geopolitical shocks—including the near-blockade of the Strait of Hormuz and surging energy prices. The blue-chip S&P 500 index has climbed approximately 12% this year, on track for a fourth consecutive year of double-digit gains. According to FactSet data stretching back to 2009, massive AI investment is the core driver behind this equity rally, pushing corporate profit margins to new highs. In Q2 2026, S&P 500 constituent earnings surged 52% year-over-year. Even excluding Amazon (AMZN) and Alphabet (GOOGL)—which recorded massive one-time gains from investing in other AI companies—index earnings growth still reached an impressive 34%.
Veitmane noted that robust profit growth makes corporate fundamentals look exceptionally solid compared to concerns about US government fiscal prudence. In April of last year, Trump's sweeping "Liberation Day" tariff policy triggered a brief panic over America's financial hegemony, sparking simultaneous selloffs in stocks, bonds, and the dollar. However, investors' fear of missing out on further AI stock gains quickly overwhelmed the fleeting "sell America" sentiment.
The shifting capital flows are now challenging the dollar's traditional pricing logic. Saravelos pointed out that the dollar's value may now be more closely correlated with funds entering US equities, meaning the currency could actually strengthen as risk appetite increases. This breaks the historical pattern where the dollar rebounded only when foreign investors dumped risky assets and fled into Treasuries. US assets are no longer the traditional "safe" haven—they have become the preferred risk asset instead.
However, Michiel Plakman, global head of equities at Robeco, warned that bond selling remains the primary threat to stock markets. If yields surge further, raising corporate borrowing costs and making fixed-income investments more attractive, the equity market that stalled this summer could eventually face a reckoning.
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