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Original author: Xu Chao

Original source: Wallstreetcn

A series of policy signals from Washington is reigniting the "sell the US" debate among global bond and FX investors. The Fed Chair's shift in communication style, Treasury intervention in the FX market, combined with widening fiscal deficits and the specter of trade wars, are shaking market confidence in US assets once again.

The latest developments show that Fed Chair Warsh tends to reduce policy communication, raising doubts about the Fed's commitment to fighting inflation. Meanwhile, according to The Wall Street Journal, Trump has spoken with Warsh multiple times since he took office, breaking with recent conventions—although there is no evidence that interest rates were discussed. Treasury Secretary Bessent has signed off on US assistance to Japan's intervention in the FX market to support the yen—the first such coordinated action in nearly three decades—further weighing on the dollar.

These twin shocks have already been priced into markets. The 30-year Treasury yield broke above 5%, hitting its highest level since 2007, although it has since pulled back. The Bloomberg Dollar Spot Index has fallen roughly 2% from its June peak, with the dollar weakening against nearly all G10 currencies—an unusual divergence against the backdrop of still-elevated US interest rates.

Rajeev De Mello, global macro portfolio manager at Gama Asset Management, said it is precisely the policy uncertainty that has him selling Treasuries and the dollar. "Bessent and Warsh are a double whammy for global markets, and investors have to price their policy risk into the dollar and the Treasury curve—this is the Trump administration premium."

"Sell the US" Reemerges, But Different from Last Year

The "sell the US" trade first drew attention last April, when Trump announced tariffs, triggering a simultaneous selloff in the dollar, US equities, and Treasuries. Although that episode quickly subsided, it shook the long-standing assumption that the US could finance its widening fiscal deficits indefinitely thanks to the dollar's reserve currency status and deep capital markets.

This time, the situation is more complex. In equities, strong tech stocks have pushed the S&P 500 to fresh record highs, and there is no sign of a broad market collapse. Foreign holdings of US Treasuries stood at $9.4 trillion as of May, up 4% from a year earlier, indicating that overall confidence remains intact.

However, some global investors in the bond and FX markets are adjusting their positions.

Carol Lye, Singapore-based portfolio manager at Brandywine Global Investment Management, said the firm holds a medium-term bearish dollar position. "Now Bessent is also coming out and saying the yen should strengthen, which validates our weak-dollar view." She also noted that the "chaotic signals" coming out of Washington are not conducive to capital inflows into the US.

Credibility of the Fed in Question, Long-End Treasury Pressure Builds

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

Bloomberg Economics data shows that the term premium on 30-year Treasuries—the extra compensation investors demand for holding long-dated bonds—rose to 1.56% this week, the highest level since 2013. Allianz Global Investors (with €598 billion in assets under management) currently favors steepener trades, positioning in five-to-seven-year maturities against 30-year bonds.

Ranjiv Mann, senior portfolio manager at the firm, said, "The risk is that the Fed might fall behind the curve in the hiking cycle, and long-end yields could become more unanchored, while the fiscal challenges facing the US are already severe." Meanwhile, the Treasury raised its quarterly borrowing estimate to $739 billion this week, and markets broadly expect authorities to continue a short-dated bill-heavy issuance strategy, with supply pressures continuing to build.

Yen Intervention Sparks Debate on Dollar Outlook

The US-assisted FX intervention has prompted investors to reassess the structural trajectory of the dollar.

Bessent defended the move in a CNBC interview, saying continued yen weakness could trigger broader depreciation across Asian currencies, and that Washington would support Japan "at all costs" in a manner conducive to the US economy and global market stability.

The intervention was executed by buying euros, selling dollars, and converting into yen, in order to avoid directly impacting the Treasury market. Bessent described it as a "reconfiguration of reserves." However, market participants caution that if Japan—the largest foreign holder of US Treasuries, with over $1 trillion in holdings—is forced to sell some Treasuries to fund the intervention, the spillover could still transmit to the Treasury market.

Steve Brice, global chief investment officer at Standard Chartered's wealth management division, expects the dollar to decline roughly 3% to 4% over the next 12 months. "Government actions and other factors are gradually eroding the structural advantages of US markets."

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

Multiple strategists stress that no one is currently predicting the end of the dollar's global reserve currency status, or that Treasuries will lose their position as the global benchmark risk-free asset.

Lotfi Karoui, multi-asset credit strategist at Pacific Investment Management Company, noted in a research report that US assets remain broadly attractive to foreign buyers, and the lack of large-scale correlated selling is evidence of that. So far this year, only about 2% of trading days have seen simultaneous declines in 10-year Treasuries, US investment-grade corporate bond spreads, and the dollar. "If there were genuine loss of confidence in US exceptionalism, such correlated selling should occur more frequently."

But Ronald Temple, chief market strategist at Lazard, pointed out that the core risk is that foreign purchases of US Treasuries are no longer keeping pace with the pace of US debt expansion. In a Bloomberg TV interview, he said, "The confidence backdrop around the safe-haven status of US assets is shifting; there are lots of questions. In the years ahead, dollar depreciation trends will re-emerge."