Global Funds Reassess US Assets Amid Trump Premium, Fed Doubts, and Treasury Intervention Risks

Woofun AI reports that the resurgence of "Sell America" sentiment is being driven by Washington policy signals, specifically the so-called "Trump premium" identified by Xu Chao of Wallstreetcn. This market recalibration stems from a convergence of Federal Reserve Chair Warsh’s altered communication style, direct Treasury Department intervention in foreign exchange markets, and expanding fiscal deficits. The shadow of ongoing trade wars further complicates the landscape, leading global bond and foreign exchange investors to revive discussions on divesting from U.S. assets. These twin shocks have already manifested in market prices, challenging the foundational confidence in dollar-denominated instruments.

The credibility of the Federal Reserve is increasingly questioned due to shifts in communication under Warsh. Recent developments indicate that Warsh tends to reduce policy communications, raising doubts about the Fed’s commitment to fighting inflation.

Meanwhile, Trump has spoken to Warsh multiple times since taking office, breaking with recent tradition. Although there is no evidence so far that they discussed interest rate issues, the mere frequency of contact signals potential political interference. This dynamic creates uncertainty regarding the central bank's independence and its ability to anchor inflation expectations effectively.

Treasury Secretary Bessent signed off on the U.S. assisting Japan in intervening in the currency market to support the Euro. This marks the first such coordinated effort in nearly three decades and further pressures the dollar. The intervention involved buying Euro and selling dollar to acquire Euro, aiming to avoid directly impacting the U.S. Treasury market. Bessent described this as "a reallocation of reserves." However, market participants warn that if Japan—the U.S.’s largest holder of foreign U.S. Treasuries, with holdings exceeding $1 trillion—is forced to sell some of its Treasuries to fund the intervention, the effects could still ripple through the U.S. Treasury market.

Market price reactions reflect these structural shifts. The yield on 30-year U.S. Treasuries rose above 5%, hitting a new high since 2007, although it has since fallen slightly.

Concurrently, the Bloomberg Dollar Spot Index has dropped about 2% since its June peak. The dollar has weakened against almost all G7 currencies—a trend that stands in sharp contrast to the fact that U.S. interest rates remain high. This divergence suggests that traditional yield differentials are no longer the sole driver of currency valuation, as policy risks begin to dominate pricing models.

Investor sentiment is increasingly defined by the "Trump administration premium." Rajeev De Mello, global macro portfolio manager at Gama Asset Management, said that it is precisely due to policy uncertainty that he is selling U.S. Treasuries and the dollar. "Bessent and Warsh represent a double blow to global markets. Investors must factor in their policy risks into the dollar and U.S. Treasury yield curves—that’s what we call the Trump administration premium." This framing highlights how executive branch actions are being priced into long-term asset valuations, creating a persistent risk premium for U.S. exposures.

Woofun AI data shows that the current 'selling U.S. assets' narrative differs from last year’s sell-off. Such discussions first gained attention last April when Trump announced tariff measures, triggering simultaneous sell-offs in the dollar, U.S. stocks, and U.S. Treasuries. Although that wave quickly subsided, it shook the long-held assumption that the U.S. could finance its ever-expanding fiscal deficits indefinitely. As of May, foreign investors held $9.4 trillion in U.S. Treasuries, up 4% from a year earlier, indicating that overall confidence still exists.

However, the complexity of the current environment means that while equity markets remain resilient, fixed income and FX markets are undergoing significant position adjustments.

Fund managers are adjusting positions based on confusing Washington messages. Carol Lye, Singapore-based fund manager at Brandywine Global Investment Management, said her firm holds a medium-term bearish stance on the dollar. "Bessent now also says the Euro should strengthen, which supports our view of a weak dollar." She added that the "confusing messages" from Washington are not conducive to capital flowing into the U.S. This sentiment underscores a growing disconnect between official rhetoric and market reality, where policy inconsistency is viewed as a liability rather than a strategic flexibility.

Fed credibility concerns are driving term premium spikes and yield curve strategies. One of the main concerns in the market is whether the Federal Reserve can effectively anchor inflation expectations under Warsh’s leadership. Analysts believe that if the Fed falls behind the rate hike cycle, longer-dated yields will face further upward pressure. Data from Bloomberg Economic Research shows that the term premium for 30-year U.S. Treasuries—i.e., the extra return investors demand for holding longer-duration bonds—rose to 1.

56% this week, the highest level since 2013. Allianz Global Investors (with an AUM of €598 billion) is currently favoring trades that capitalize on a steepening yield curve, focusing on 5- to 7-year bonds as a counterweight to 30-year bonds. Ranjiv Mann, senior portfolio manager at the firm, said, "The risk is that the Fed might fall behind the curve during the rate hike cycle, causing longer-dated yields to become even more unanchored, especially given the severe fiscal challenges facing the U.S."

Fiscal borrowing forecasts and the mechanics of FX intervention present additional risks. The Treasury Department raised its forecast for borrowing for the current quarter to $739 billion. The market generally expects the authorities to continue with a strategy centered on issuing T-bills, leading to ongoing supply pressure. Bessent defended the intervention move in an interview with CNBC, saying that a continued weakening of the Euro could lead to broader depreciation of Asian currencies, and Washington would "do whatever it takes" to support Japan in a way that benefits the U.S. economy and stabilizes global markets. Steve Brice, global head of investment for Standard Chartered’s wealth management division, predicts that the dollar will fall by about 3% to 4% in the next 12 months. "Government actions and other factors are gradually eroding the structural advantages of the U.S. market."

The 'U.S. exceptionality' theory isn’t over, but hidden risks cannot be ignored. Many strategists emphasize that no one is predicting an end to the dollar’s status as the global reserve currency or to U.S. Treasuries’ role as the global benchmark for risk-free assets. Lotfi Karoui, multi-asset credit strategist at PIMCO, pointed out in a research report that U.S. assets remain attractive to foreign buyers overall, as evidenced by the lack of large-scale synchronized sell-offs. So far this year, only about 2% of trading days saw simultaneous declines in the yield spread between 10-year U.S. Treasuries and U.S.

investment-grade corporate bonds, as well as the dollar. "If there were really a loss of confidence in the U.S. exceptionality theory, such synchronized sell-offs should occur more frequently." But Ronald Temple, chief market strategist at Lazard, noted that the core issue is that the speed at which foreign funds buy U.S. Treasuries can no longer keep up with the pace at which the U.S. is increasing its debt. In an interview with Bloomberg Television, he said, "The backdrop of confidence in U.S. safe-haven assets is changing, with many questions arising. In the coming years, a downward trend for the dollar is likely to resurface."