Global investors revisit U.S. policy risk as the "sell the U.S." trade returns

A fresh run of signals out of Washington is reviving debate among global bond and FX investors over whether to cut exposure to U.S. assets. Investors are parsing a combination of factors: a perceived shift in Federal Reserve Chair Walsh's communication approach, the Treasury's involvement in foreign-exchange market action, widening fiscal deficits, and renewed trade-war risk. Together, the developments have raised questions about the durability of confidence in U.S. markets. According to The Wall Street Journal, Walsh has leaned toward scaling back policy guidance, prompting concern that the Fed could appear less resolute on inflation. The newspaper also reported that Trump has repeatedly called Walsh since his appointment, a break from recent precedent, though it said there is currently no evidence interest rates were discussed. At the same time, Treasury Secretary Bessent approved U.S. support for Japan's yen-buying intervention, the first coordinated move of its kind in nearly 30 years. The action added pressure on the dollar and intensified scrutiny of U.S. policy direction. Markets have already reacted. The 30-year U.S. Treasury yield moved above 5%, a level last seen in 2007, before easing back. The Bloomberg Dollar Spot Index has fallen about 2% from its June high, with the greenback weakening against nearly all G10 currencies, an unusual pattern given still-elevated U.S. interest rates. Rajeev De Mello, global macro portfolio manager at Gama Asset Management, said he is selling U.S. Treasuries and the dollar because of policy uncertainty. "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," he said. The setup differs from last year's "sell America" episode. The trade gained attention in April last year after Trump announced tariff measures, triggering simultaneous declines in the dollar, U.S. stocks and Treasuries. Although the move faded quickly, it challenged a long-held assumption that the U.S. could finance expanding deficits indefinitely thanks to the dollar's reserve status and deep capital markets. This time, the picture is more mixed. Tech strength pushed the S&P 500 to a new all-time high, with no broad equity rout. Foreign holdings of U.S. Treasuries stood at $9.4 trillion as of May, up 4% from a year earlier, pointing to continued aggregate confidence. Still, positioning is shifting in rates and FX. Carol Lye, a fund manager at Brandywine Global Investment Management, said the firm maintains a medium-term bearish stance on the U.S. dollar. "Now that Bessent has also come out saying the yen should strengthen, this validates our view of a weak dollar," she said, adding that "confusing signals" from Washington are discouraging capital inflows. A central concern is whether the Fed can keep inflation expectations anchored under Walsh. Analysts warn that if the Fed falls behind the curve, long-term yields could face further upward pressure. Bloomberg Economics data show the term premium on 30-year Treasuries rose this week to 1.56%, the highest since 2013. Allianz Global Investors, which manages $598 billion, said it currently favors steepener trades, positioning five- to seven-year bonds against 30-year bonds. Ranjiv Mann, a senior portfolio manager at the firm, said the risk is the Fed "may fall behind the curve" in its hiking cycle, pushing long-term yields "even more unhinged" as the U.S. faces heavy fiscal strain. Supply dynamics are also in focus. The Treasury lifted its quarterly borrowing forecast this week to $739 billion. Markets broadly expect issuance to remain concentrated in short-term Treasury bills, a strategy that could keep supply pressure building. The yen intervention has also reopened debate over the dollar's longer-run path. In a CNBC interview, Bessent defended the move, arguing that sustained yen weakness could spill into broader depreciation across Asian currencies. He said 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 executed by buying euros and selling U.S. dollars to purchase yen, a structure intended to avoid direct stress on the Treasury market. Bessent described it as a "reallocation of reserves." Some investors caution that market spillovers remain possible if Japan, the largest foreign holder of U.S. Treasuries with more than $1 trillion, ends up selling some holdings to finance intervention. Steve Brice, global chief investment officer for wealth management at Standard Chartered, expects the dollar to fall about 3% to 4% over the next 12 months as "government actions and other factors are gradually eroding the structural advantages of the U.S. market." Strategists stressed that few are calling for the end of U.S. dollar reserve-currency status or Treasuries' role as the global risk-free benchmark. Lotfi Karoui, a multi-asset credit strategist at PIMCO, wrote that U.S. assets remain broadly attractive to foreign buyers, citing the lack of widespread synchronized selling. This year, concurrent 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 confidence in U.S. exceptionalism were truly eroding, such synchronized selling would be far more frequent," he wrote. Ronald Temple, chief market strategist at Lazard, framed the core issue differently: foreign demand for Treasuries is not keeping pace with the rate of new U.S. borrowing. In an interview with Bloomberg Television, he said the foundation of confidence in U.S. safe assets is shifting, leaving "significant questions". Over coming years, he added, a renewed depreciation trend in the dollar is likely to return.