Global bond and currency investors are debating whether to revive last year's "short America" trade following a series of economic policy decisions from Washington over the past two weeks.
First, Federal Reserve Chair Kevin Warsh's preference for sparse communication has raised doubts about the Fed's commitment to fighting inflation, especially given an unusually high number of officials supporting an immediate rate hike. Then, U.S. Treasury Secretary Bessent approved American support measures to boost Japan's yen — the first such coordinated effort in nearly 30 years. While the intervention was conducted through the euro to avoid disrupting the U.S. Treasury market, it still risks putting pressure on the dollar.
Concerns over fiscal conditions, trade wars, and ongoing conflict in the Middle East, which could also sustain inflation, have led some in the market to reassess their preference for U.S. Treasuries and the dollar. There is growing worry that U.S. policy is becoming difficult to decipher again. The 30-year U.S. Treasury yield has risen above 5%, hitting its highest level since 2002, though it has recovered some ground since the Fed meeting. Meanwhile, despite higher yields, which typically support the dollar, the currency has weakened against almost all G10 currencies over the past month.
Rajeev De Mello, global macro portfolio manager at Gama Asset Management, said, "Bessent and Warsh are a double whammy for global markets that investors cannot ignore." He is selling U.S. Treasuries and the dollar, partly due to policy uncertainty. "They must begin pricing policy risk into the dollar and the yield curve, and in fact, they are doing so now. This is the 'Trump administration premium.'"
Last April, the "short America" trade gained momentum when President Trump's announced tariff hikes triggered a simultaneous sell-off in the dollar, stocks, and U.S. Treasuries. Although that wave quickly faded, it challenged the assumption that the U.S. could indefinitely rely on the dollar's reserve currency status and deep capital markets to finance its widening fiscal deficits. This time, the situation is more nuanced. U.S. stocks remain resilient, with tech gains pushing the S&P 500 to record highs, and capital flows indicate continued trust in America. Government data shows foreign investors held $9.4 trillion in U.S. Treasuries as of May, up 4% year-on-year.
However, in the bond and forex spheres, some global investors warn that without a clearer inflation strategy, the Fed risks losing control of the debt market. Any direct U.S. effort to support the yen could weaken the dollar. If Japan, the largest foreign holder of U.S. government debt, is forced to sell some of its over $1 trillion holdings to fund intervention, it could also impact U.S. Treasuries. Carol Lai, a fund manager at Saxo Bank in Singapore, said, "This whole confusing mix of messages is not helpful for capital inflows into the U.S." Her firm holds medium-term bearish dollar positions. "The fact that Bessent has now joined in, thinking the yen should perhaps be stronger, will help our dollar thesis — that we are bearish on the dollar."
The Bloomberg Dollar Spot Index has fallen about 2% from its June high. Strategist Skylar Montgomery Koning noted, "Against the backdrop of already pressured Treasury yields from concerns about the Fed's inflation credibility under Warsh, Washington has a motivation to limit forced bond selling." Bessent defended the U.S. support for the yen, saying weak yen risks causing a broad depreciation of Asian currencies. He told media on Tuesday that Washington would "do whatever it takes" to support Tokyo in a way that benefits the U.S. economy and stabilizes global markets. When asked about the reported use of euros to buy yen in Friday's intervention, Bessent stated that U.S. officials were in close contact with European partners, informing them the move was "just a reallocation of our foreign exchange reserves."
The intervention has raised questions about the dollar's outlook. Steve Brice, global chief investment officer for wealth management at Standard Chartered Bank, said, "Investors hate uncertainty." He expects the dollar to fall about 3% to 4% over the next 12 months, noting that government actions and other factors are eroding the structural advantages of U.S. markets.
American Exceptionalism
No one believes the dollar's dominance in the $9.5 trillion daily forex market is ending, nor that the status of U.S. Treasuries as the global benchmark risk-free asset is shaken. Lotfi Karoui, multi-asset credit strategist at Pacific Investment Management Co., wrote in a report that U.S. assets remain broadly attractive to foreign buyers, with a lack of significant coordinated selling as evidence. He noted that only about 2% of trading days and rolling five-day periods this year saw simultaneous selling of 10-year Treasuries, U.S. investment-grade corporate credit spreads, and the dollar. "If people were truly losing faith in 'American exceptionalism,' we would expect to see such sell-offs occur much more frequently."
The problem, however, is that their buying pace hasn't kept up with the growth in U.S. borrowing. The U.S. Treasury this week raised its estimated borrowing needs for the current quarter to $739 billion, and market participants expect officials to continue a short-dated issuance strategy in the coming months. Allianz Investment, which manages 598 billion euros (about $690 billion), favors yield curve steepening trades, particularly long 5-year and 7-year notes and short 30-year bonds, as they believe the Fed's slightly dovish stance could pressure long-term bonds. Senior portfolio manager Ranjiv Mann said, "The risk is that the Fed may ultimately fall behind the curve in terms of any rate hiking cycle. You could see the anchoring at the long end of the curve loosen a bit. And it's well-known that the U.S. faces significant fiscal challenges."
These concerns are being priced in. Data shows the term premium on 30-year Treasuries — the extra yield investors demand for holding long-term bonds — rose to 1.56% this week, the highest since 2013. Ronald Temple, chief market strategist at Lazard Financial Advisors and Asset Management, said in an interview this week, "The trust backdrop for the U.S. as a safe haven is changing, with a lot of questions swirling around. Over the next few years, you will see the dollar resume its depreciation."
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