"Sell America" Trade Makes a Comeback! Global Funds Reprice Washington's Policy Risks

The market is being forced to factor in the "Trump premium," putting the foundation of dollar assets to a severe test.

Written by: Xu Chao, Wall Street Insights

The continuous policy signals from Washington are reigniting discussions among global bond and foreign exchange investors about "selling America." The shift in communication style from the Federal Reserve Chair, the Treasury's intervention in the foreign exchange market, combined with the expansion of the fiscal deficit and the looming trade war, have shaken market confidence in U.S. assets once again.

Recent developments show that Federal Reserve Chair Waller is inclined to reduce policy communication, raising doubts in the market about the Fed's commitment to combating inflation. Meanwhile, according to the Wall Street Journal, Trump has spoken with Waller multiple times since his appointment, breaking a recent norm—although there is currently no evidence that they discussed interest rate issues. Treasury Secretary Yellen has approved U.S. assistance for Japan's intervention in the currency market to support the yen, marking the first such coordinated action in nearly thirty years, further suppressing the dollar's performance.

These dual shocks have already been reflected in market prices. The yield on 30-year U.S. Treasuries has surged above 5%, reaching a new high since 2007, although it has since retreated; the Bloomberg Dollar Spot Index has fallen about 2% since its June peak, with the dollar weakening against nearly all G10 currencies—this trend is unusually divergent given that U.S. interest rates remain high.

Rajeev De Mello, Global Macro Portfolio Manager at Gama Asset Management, stated that due to policy uncertainty, he is selling U.S. Treasuries and dollars, saying, "Yellen and Waller are a double blow to the global market, forcing investors to factor in their policy risks into the dollar and Treasury yield curves—this is the Trump administration premium."

"Sell America" Reemerges, but Differently from Last Year

The "sell America" trade first gained attention last April when Trump announced tariff measures, triggering a simultaneous sell-off of the dollar, U.S. stocks, and Treasuries. Although that wave of selling quickly subsided, it shook long-held market assumptions—that the U.S. could indefinitely finance its expanding fiscal deficit due to its status as a reserve currency and deep capital markets.

The current situation is more complex. In the U.S. stock market, tech stocks have strongly propelled the S&P 500 index to new historical highs, and there has been no widespread market crash. The amount of U.S. Treasuries held by foreign investors reached $9.4 trillion as of May, a 4% increase from a year ago, indicating that overall confidence remains.

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 in Singapore, stated that her firm holds a bearish position on the dollar in the medium term, saying, "Yellen now also comes out to say that the yen should strengthen, which will confirm our weak dollar judgment." She also pointed out that the "chaotic messages" from Washington are detrimental to capital inflows into the U.S.

Fed's Credibility in Doubt, Long-End Treasury Pressure Rising

One of the core concerns in the market is whether the Fed can effectively anchor inflation expectations under Waller's leadership. Analysts believe that if the Fed falls behind in the rate hike cycle, long-end yields will face further upward pressure.

Bloomberg Economic Research data shows that the 30-year Treasury term premium—the extra return investors require for holding long-term bonds—rose to 1.56% this week, the highest level since 2013. Allianz Global Investors (managing €598 billion in assets) currently prefers steepening yield curve trades, focusing on positioning between five-year and seven-year bonds against 30-year bonds.

Ranjiv Mann, a senior portfolio manager at the firm, stated, "The risk is that the Fed may fall behind the curve in the rate hike cycle, and long-end yields could become even more unanchored, while the fiscal challenges facing the U.S. are already quite severe." Meanwhile, the Treasury has raised its borrowing expectations for the quarter to $739 billion, and the market generally expects authorities to continue their issuance strategy focused on short-term Treasury bills, leading to ongoing supply pressure.

Yen Intervention Sparks Controversy Over Dollar Outlook

The U.S. assistance in intervening in the foreign exchange market has prompted investors to reassess the structural trends of the dollar.

Yellen defended this move in an interview with CNBC, stating that the continued weakness of the yen could trigger a broader depreciation of Asian currencies, and Washington will support Japan "at all costs" in a way that benefits the U.S. economy and stabilizes global markets.

This intervention was implemented by buying euros and selling dollars to acquire yen, aiming to avoid a direct impact on the Treasury market. Yellen described this as a "reallocation of reserves." However, market participants warn that if Japan—the largest foreign holder of U.S. Treasuries, with holdings exceeding $1 trillion—is forced to sell some Treasuries to raise funds for intervention, the ripple effects could still transmit to the Treasury market.

Steve Brice, Chief Investment Officer of Standard Chartered Wealth Management, expects the dollar to decline by about 3% to 4% over the next 12 months, stating, "Government actions and other factors are gradually eroding the structural advantages of the U.S. market."

"American Exceptionalism" Not Over, But Risks Cannot Be Ignored

Several strategists emphasize that no one is predicting the end of the dollar's status as a global reserve currency or that U.S. Treasuries will lose their status as a global benchmark risk-free asset.

Lotfi Karoui, a multi-asset credit strategist at Pacific Investment Management Company, pointed out in a research report that U.S. assets remain attractive to foreign buyers overall, and the lack of large-scale coordinated sell-offs is evidence of this. This year, only about 2% of trading days have seen simultaneous declines in the 10-year Treasury, U.S. investment-grade corporate bond spreads, and the dollar, "If confidence in American exceptionalism were truly lost, such coordinated sell-offs should occur more frequently."

However, Ronald Temple, Chief Market Strategist at Lazard, pointed out that the core risk lies in the fact that the pace at which foreign funds are buying U.S. Treasuries is not keeping up with the pace of U.S. debt expansion. In an interview with Bloomberg Television, he stated, "The confidence surrounding the status of U.S. safe assets is changing, and there are many questions. Over the next few years, the trend of dollar depreciation will re-emerge.