(Bloomberg) — Global bond and currency investors are debating if it’s time to dust off last year’s ‘Sell America’ trade after a flurry of economic-policy decisions out of Washington over the past two weeks.
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First, Federal Reserve Chair Kevin Warsh’s preference for sparse communication cast doubt on the central bank’s commitment to fighting inflation, especially since an unusually high number of officials were in favor of an immediate interest-rate hike.
Then Treasury Secretary Scott Bessent signed off on US support to help Japan prop up the yen — the first such coordinated effort in almost 30 years. While the intervention was carried out via the euro and designed to avoid disrupting the Treasury market, it still risks putting pressure on the dollar.
With fiscal concerns, a trade war and the ongoing conflict in the Middle East also threatening to underpin inflation, some in markets are starting to reassess their taste for US bonds and the dollar amid concern that US policy is again becoming hard to decipher.
The 30-year Treasury yield has risen above 5% to its highest since 2007 although has retraced some of its move since the Fed meeting, while the dollar has weakened against almost every Group-of-10 currency over the past one month despite higher US yields, which would normally support it.
“Bessent and Warsh are a double whammy to global markets that investors can’t ignore,” said Rajeev De Mello, global macro portfolio manager at Gama Asset Management, who is selling Treasuries and the dollar partly because of the policy uncertainty.
“They have to start pricing risks of their policies into the dollar, into the Treasuries curve, and in fact, they’re doing it right now. It’s the Trump administration premium,” he said.
The “Sell America” trade gained traction last April, when President Donald Trump’s tariff announcements triggered a simultaneous selloff in the dollar, stocks and US government bonds. While the move quickly faded, it challenged the assumption that the US could indefinitely rely on the dollar’s reserve-currency status and deep capital markets to finance widening fiscal deficits.
This time, the picture is more nuanced. US stocks remain resilient, with a rally in technology stocks pushing the S&P 500 to a record high. Flows also suggest ongoing faith in the US. Foreign investors held $9.4 trillion of Treasuries as of May, up 4% from a year earlier, according to US government data.
But in bonds and currencies, some global investors warn the Fed risks losing its grip on the debt market without a clearer inflation strategy, while any direct US effort to support the yen weakens the dollar. That could also spill over into Treasuries if Japan — the largest foreign holder of US government debt — is forced to sell part of its more than $1 trillion holdings to fund intervention.
“This whole mix of confusing messages does not help capital flows into the US,” said Carol Lye, money manager at Brandywine Global Investment Management in Singapore. The firm has a medium-term bearish dollar position.
“The fact that now Bessent is jumping on that and saying that maybe the yen should be stronger, that’s going to help our dollar story — our weaker dollar story,” she said.
The Bloomberg Dollar Spot Index has lost about 2% since a peak in June.
What Bloomberg Strategists Say…
“With Treasury yields already under pressure amid concerns over the Fed’s inflation fighting credibility under Warsh, Washington has an incentive to limit forced bond sales”
— Skylar Montgomery Koning, Markets Live strategist
Bessent defended US support for the yen, saying its weakness risked broader depreciation across Asian currencies. He told CNBC on Tuesday that Washington “will do whatever it takes” to support Tokyo in a way that benefits the US economy and stabilizes global markets.
Asked about the reported use of euros to buy yen in Friday’s intervention, Bessent said US officials were in close contact with European partners and told them the move was “just a reallocation of our reserves.”
The intervention has raised questions about the outlook for the dollar.
“Investors hate uncertainty,” said Steve Brice, global chief investment officer, group wealth management at Standard Chartered in Singapore. He expects the dollar to fall about 3% to 4% over the next 12 months, saying that government actions and other factors were chipping away at the structural strength of US markets.
US Exceptionalism
To be sure, no one is suggesting the end of the dollar’s dominance in the $9.5 trillion-a-day currency market or Treasuries’ status as the world’s benchmark risk-free asset.
US assets generally still remain attractive to foreign buyers, and one sign is the absence of major correlated selloffs, Lotfi Karoui, multi-asset credit strategist at Pacific Investment Management Co. wrote in a note.
This year, only around 2% of trading days and rolling five-day periods have seen 10-year Treasuries, US investment-grade corporate bond spreads and the dollar all sell off in tandem, he said. “If there were a true loss of confidence in US exceptionalism, we would expect such selloffs to be much more frequent.”
But the catch is that their buying has not kept pace with how fast US borrowing is growing. The Treasury this week boosted its estimated borrowing needs for the current quarter to $739 billion, and market participants expect officials to carry on their bill-heavy issuance strategy in the months ahead.
Allianz Global Investors, which oversees 598 billion euros ($690 billion), favors yield-curve steepener trades, particularly in five- and seven-year maturities against 30-year bonds, on the view that the Fed’s marginally dovish stance could leave longer-dated Treasuries under pressure.
“The risk is that the Fed could end up getting behind the curve in terms of any rate-hiking cycle,” said Ranjiv Mann, a senior portfolio manager at the investment management firm. “You could see the back-end of the curve becoming a little bit more unanchored. And, as we know, the US faces significant fiscal challenges.”
The concerns are showing up in prices. The term premium on 30-year Treasuries — the extra yield investors demand to hold long-dated debt — rose to 1.56% this week, the highest since 2013, according to Bloomberg Economics.
“There are just a lot of questions swirling around a changing backdrop for confidence in the US as the safe haven asset,” Ronald Temple, chief market strategist for Lazard’s Financial Advisory and Asset Management businesses, said in a Bloomberg TV interview this week. “Over the next several years, you’re going to see US dollar depreciation resume.”
–With assistance from Haidi Lun.
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