Original author: Xu Chao
Source: Wall Street Journal
The series of policy signals coming from Washington are reigniting global discussions among bond and foreign exchange investors about "selling the U.S." The shift in the Federal Reserve Chair’s communication style, combined with Treasury intervention in foreign exchange markets, rising fiscal deficits, and the looming threat of trade wars, have triggered renewed doubts about confidence in U.S. assets.
Recent developments indicate that Fed Chair Walsh is inclined to reduce policy communication, sparking market doubts about the Fed’s commitment to fighting inflation. Meanwhile, according to The Wall Street Journal, Trump has repeatedly called Walsh since his appointment, breaking recent precedent—though there is currently no evidence that interest rates were discussed. Treasury Secretary Bessent has also signed off on U.S. support for Japan’s foreign exchange intervention to bolster the yen, marking the first such coordinated action in nearly thirty years, further pressuring the dollar.
The dual shock described above has already been reflected in market prices. The yield on 30-year U.S. Treasuries rose above 5%, reaching a level not seen since 2007, though it has since pulled back; the Bloomberg Dollar Spot Index has declined by approximately 2% since its June high, with the U.S. dollar weakening against nearly all G10 currencies—a move that stands in unusual contrast to the backdrop of still-elevated U.S. interest rates.
Rajeev De Mello, Global Macro Portfolio Manager at Gama Asset Management, said that due to policy uncertainty, he is selling U.S. Treasuries and the dollar: "Biden and Walsh are a double blow to global markets; investors must price in their policy risk into the dollar and U.S. Treasury curve—that’s the Trump administration premium."
"Selling America" is resurfacing, but it's different from last year
The "sell America" trade first gained attention in April last year, when Trump announced tariff measures, triggering simultaneous sell-offs in the dollar, U.S. stocks, and U.S. Treasuries. Although that rally quickly subsided, it shook a long-standing market assumption—that the U.S. could indefinitely finance its growing fiscal deficits thanks to the dollar’s reserve currency status and deep capital markets.
This situation is more complex. In the U.S. stock market, strong performance in tech stocks pushed the S&P 500 to a new all-time high, with no widespread market collapse. Foreign holdings of U.S. Treasuries reached $9.4 trillion as of May, a 4% increase from a year earlier, indicating continued overall confidence.
However, some global investors in the bond and foreign exchange markets are adjusting their positions.
Carol Lye, a fund manager at Brandywine Global Investment Management, said the firm holds a medium-term bearish position on the U.S. dollar, adding, "Now that Bessent has also come out saying the yen should strengthen, this validates our view of a weak dollar." She also noted that the "confusing signals" coming from Washington are discouraging capital inflows into the United States.
The Fed's credibility is in question, putting upward pressure on long-term U.S. Treasuries.
One of the core market concerns is whether the Fed can effectively anchor inflation expectations under Waugh’s leadership. Analysts believe that if the Fed falls behind the rate hiking cycle, long-term yields will face additional upward pressure.
Bloomberg Economics data shows that the term premium on 30-year U.S. Treasuries—the extra return investors demand for holding long-term bonds—rose this week to 1.56%, the highest level since 2013. Allianz Global Investors (with $598 billion in assets under management) currently favors steepener trades, focusing on positioning five- to seven-year bonds against 30-year bonds.
Ranjiv Mann, Senior Portfolio Manager at the company, said, "The risk is that the Fed may fall behind the curve in its rate-hiking cycle, causing long-term yields to become even more unhinged, amid already severe fiscal challenges facing the United States." Meanwhile, the Treasury raised its quarterly borrowing forecast to $739 billion this week, and the market broadly expects authorities to continue their strategy of issuing predominantly short-term Treasury bills, leading to ongoing accumulation of supply pressure.
Yen intervention sparks debate over the dollar's outlook
The U.S. intervention in the foreign exchange market has prompted investors to reassess the structural trajectory of the dollar.
Bessent defended the move in an interview with CNBC, stating that the yen's persistent weakness could trigger broader depreciation across Asian currencies, and Washington would "do whatever it takes" to support Japan in a way that benefits the U.S. economy and stabilizes global markets.
The intervention was carried out by buying euros and selling U.S. dollars to purchase yen, aiming to avoid direct pressure on the U.S. Treasury market. Bessent described this as a "reallocation of reserves." However, market participants caution that if Japan—the largest foreign holder of U.S. Treasuries, with holdings exceeding $1 trillion—is forced to sell some of its Treasuries to fund the intervention, the ripple effects could still reach the U.S. Treasury market.
Steve Brice, Global Chief Investment Officer at Standard Chartered's Wealth Management division, expects the US dollar to decline by approximately 3% to 4% over the next 12 months, as "government actions and other factors are gradually eroding the structural advantages of the US market."
American exceptionalism has not ended, but the risks cannot be ignored.
Several strategists emphasized that no one is currently predicting an end to the U.S. dollar’s status as the global reserve currency or U.S. Treasuries’ status as the global benchmark risk-free asset.
Lotfi Karoui, a multi-asset credit strategist at PIMCO, noted in a research report that U.S. assets remain broadly attractive to foreign buyers, as evidenced by the absence of large-scale synchronized selling. This year, synchronized declines in 10-year U.S. Treasuries, U.S. investment-grade corporate bond spreads, and the U.S. dollar have occurred on only about 2% of trading days. "If confidence in U.S. exceptionalism were truly eroding, such synchronized selling would be far more frequent."
But Ronald Temple, Chief Market Strategist at Lazard, pointed out that the core concern is that the pace at which foreign capital is buying U.S. Treasuries has fallen behind the rate at which the U.S. is increasing its borrowing. In an interview with Bloomberg Television, he said, "The backdrop of confidence in the status of U.S. safe assets is changing, with significant questions remaining. Over the coming years, a depreciation trend for the dollar is likely to reemerge."