Original Author: Xu Chao
Original Source: Wall Street News
Policy signals emanating consecutively from Washington are reigniting discussions of "Sell America" among global bond and foreign exchange investors. The shift in communication style from the Federal Reserve Chair, the Treasury's intervention in the forex market, coupled with expanding fiscal deficits and the specter of trade wars, are causing a new wave of wavering confidence in U.S. assets.
Latest developments show that Fed Chair Warsh favors reducing policy communication, raising market doubts about the Fed's anti-inflation commitment. Meanwhile, according to The Wall Street Journal, Trump has spoken with Warsh multiple times since his appointment, breaking recent precedent—though there is no evidence that rates were discussed. Treasury Secretary Bessant signed off on U.S. assistance in Japan's intervention in the currency market to support the yen, the first such coordinated action in nearly thirty years, further weighing on the dollar.
This double shock is already reflected in market prices. The 30-year Treasury yield broke above 5%, hitting its highest level since 2007, though it has since pulled back; the Bloomberg Dollar Spot Index has fallen about 2% from its June high, with the dollar weakening against almost all G10 currencies—a move that appears anomalous against the backdrop of still-high U.S. interest rates.
Rajeev De Mello, Global Macro Portfolio Manager at Gama Asset Management, stated that due to policy uncertainty, he is selling Treasuries and dollars, "Bessant and Warsh are a double whammy for global markets. Investors have to price their policy risks into the dollar and the Treasury curve—that's the Trump administration premium."
"Sell America" Reemerges, but Differs from Last Year
The "Sell America" trade first gained attention in April last year when Trump announced tariff measures, triggering synchronized selling of the dollar, U.S. stocks, and Treasuries. Although that episode subsided quickly, it shook a long-held market assumption—that the U.S. could rely on the dollar's reserve currency status and deep capital markets to finance its ever-expanding fiscal deficit indefinitely.
This time, the situation is more complex. In U.S. equities, the strength in tech stocks has driven the S&P 500 to new record highs, with no broad-based market crash. Foreign holdings of U.S. Treasuries reached $9.4 trillion as of May, up 4% from a year ago, indicating overall confidence remains.
However, some global investors in the bond and foreign exchange markets are adjusting their positions.
Carol Lye, Portfolio Manager at Brandywine Global Investment Management in Singapore, said her firm holds a medium-term bearish dollar position. "Now Bessant has also stepped out to say the yen should be stronger, which will support our weak dollar view." She also pointed out that the "confusing signals" from Washington are not conducive to capital flowing into the U.S.
Fed Credibility in Question, Pressure Mounts on Long-End Treasuries
A core market concern is whether the Fed, under Warsh, can effectively anchor inflation expectations. Analysts believe that if the Fed lags behind the tightening cycle, long-end yields will face further upward pressure.
Bloomberg Economics data shows the term premium on 30-year Treasuries—the extra return investors demand for holding longer-term bonds—rose to 1.56% this week, the highest level since 2013. Allianz Global Investors (€598 billion AUM) currently favors steepener trades, focusing on positioning five- to seven-year against 30-year bonds.
The firm's Senior Portfolio Manager Ranjiv Mann said, "The risk is that the Fed may be behind the curve on the tightening cycle, and the long end could become even more unanchored, while the fiscal challenge the U.S. faces is already severe." Meanwhile, the Treasury raised its current-quarter borrowing estimate to $739 billion this week, with markets widely expecting the government to continue its strategy of relying mainly on short-term T-bills, leading to ongoing supply pressure.
Yen Intervention Sparks Debate on Dollar Outlook
The U.S. move to assist in forex market intervention has prompted a re-evaluation of the dollar's structural trajectory among investors.
Bessant defended the move in a CNBC interview, saying continued yen weakness could trigger broader depreciation of Asian currencies, and Washington would do "whatever it takes" to support Japan in a manner beneficial to the U.S. economy and stabilizing global markets.
This intervention was carried out by buying euros and selling dollars to purchase yen, aiming to avoid direct shocks to the Treasury market. Bessant described this as a "rebalancing 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 fund intervention, ripple effects could still reach the Treasury market.
Steve Brice, Global Chief Investment Officer at Standard Chartered's wealth management division, expects the dollar to fall 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 stress that no one is currently predicting the end of the dollar's global reserve currency status, or that Treasuries will lose their status as the world's benchmark risk-free asset.
Lotfi Karoui, Multi-Asset Credit Strategist at PIMCO, pointed out in a research report that U.S. assets remain attractive overall to foreign buyers, and the lack of large-scale coordinated selling is proof. So far this year, synchronized declines in 10-year Treasuries, U.S. investment-grade corporate bond spreads, and the dollar have occurred on only about 2% of trading days. "If there was a real loss of confidence in American exceptionalism, this kind of coordinated selling should happen more frequently."
But Ronald Temple, Chief Market Strategist at Lazard, notes that the core risk lies in the fact that the pace of foreign capital buying Treasuries is not keeping up with the pace of U.S. debt expansion. He stated in a Bloomberg TV interview, "The backdrop of confidence around the status of U.S. safe assets is changing. There are many questions. Over the next few years, a dollar depreciation trend will reemerge."
