"Sell America" trades are reigniting! The Federal Reserve has lost credibility, and the Treasury Secretary has rarely intervened in the yen, leading global capital to collectively flee U.S. Treasuries and the dollar.

Notably, following a series of economic policy decisions made in Washington over the past two weeks, global bond and foreign exchange investors are discussing whether the time has come to resume last year's "shorting the U.S." trade. First, Federal Reserve Chairman Kevin Warsh's preference for limited communication has raised doubts about the Fed's commitment to combating inflation, particularly given the unusual number of officials supporting an immediate rate hike. Subsequently, U.S. Treasury Secretary Basant approved U.S. measures to support the yen against Japana collaborative effort not seen in nearly 30 years. Although this intervention was conducted through euros to avoid disrupting the U.S. Treasury market, it could still exert pressure on the dollar. Concerns over fiscal conditions, the trade war, and ongoing conflicts in the Middle East may also support inflation, prompting some market participants to reassess their preferences for U.S. Treasury bonds and the dollar, as worries grow that U.S. policies are once again becoming difficult to interpret. The yield on 30-year U.S. Treasuries has risen above 5%, reaching the highest level since 2002, although it has recouped some of its gains since the last Fed meeting. Meanwhile, despite higher Treasury yields (which typically support the dollar), the dollar has weakened against nearly all G10 currencies over the past month. Rajeev D'Mello, a global macro portfolio manager at GAM Asset Management, stated, Basant and Warsh are a double blow to the global markets that investors cannot ignore. He is selling off U.S. Treasury bonds and the dollar, in part due to policy uncertainty. He said, They must start to account for policy risks in the dollar and Treasury yield curve, and in reality, they are doing just that. This is the 'Trump Administration premium.' Last April, when President Trump announced tariffs that triggered a synchronized sell-off in the dollar, stock market, and U.S. Treasuries, the "shorting the U.S." trade gained momentum. Although that wave quickly faded, it challenged the assumption that the U.S. could indefinitely rely on the dollar's reserve currency status and deep capital markets to finance its ever-expanding fiscal deficit. This time, the situation is more nuanced. The U.S. stock market remains resilient, with gains in technology stocks pushing the S&P 500 to a historic high. Fund flows also indicate that the market still retains confidence in the U.S. By May, U.S. government data showed that foreign investors held $9.4 trillion in U.S. Treasuries, a year-on-year increase of 4%. However, in the bond and foreign exchange sectors, some global investors warn that without a clearer inflation strategy, the Fed could lose control over the debt market; any U.S. efforts to directly support the yen would weaken the dollar. If Japan, the largest foreign holder of U.S. government debt, is forced to sell part of its holdings exceeding $1 trillion to fund interventions, it could also impact U.S. Treasuries. Carole Lai, a fund manager at Saxo Capital Markets in Singapore, stated, This entire confusing mix of messages is not helping capital flow into the U.S. The firm holds mid-term bearish positions on the dollar. She said, The reality is that now Basant is also involved, believing the yen should perhaps be stronger, which supports our dollar bearish thesis. The Bloomberg Dollar Spot Index has fallen about 2% since its peak in June. Strategist Skylar Montgomery Koning stated, In a background where concerns about Warsh's leadership and the Fed's anti-inflation credibility are already pressuring Treasury yields, Washington is motivated to limit forced bond sell-offs. Basant defended the U.S. approach to supporting the yen, stating that a weak yen poses risks of broader depreciation among Asian currencies. He told reporters on Tuesday that Washington will spare no effort in supporting Tokyo in a way that favors the U.S. economy and stabilizes global markets. When asked about reports of euro purchases of yen during last Friday's intervention, Basant said U.S. officials maintain close contact with European partners, informing them that this move was merely a reallocation of our currency reserves. This intervention has raised questions about the dollar's outlook. Steve Brice, Standard Chartered's Chief Investment Officer for Wealth Management, said, Investors hate uncertainty, predicting that the dollar will decline about 3% to 4% over the next 12 months, noting that government actions and other factors are weakening the structural advantages of the U.S. market. The case for American exceptionalism Indeed, no one believes that the dollar's dominance in the $9.5 trillion daily trading volume of foreign exchange markets will come to an end, nor does anyone think that U.S. Treasuries' status as the global benchmark for risk-free assets will be shaken. Lotfi Karoui, a multi-asset credit strategist at Pacific Investment Management Co., wrote in a report that U.S. assets remain overall attractive to foreign buyers, a sign being the lack of significant synchronized sell-offs. He noted that only about 2% of trading days this year and over a rolling five-day period have seen synchronized sell-offs of 10-year Treasuries, U.S. investment-grade corporate bond credit spreads, and the dollar. If people really lose faith in 'American exceptionalism,' we expect this type of sell-off to happen much more frequently. But the issue is that their buying speed has not kept pace with U.S. borrowing growth. The U.S. Treasury this week raised its expected borrowing needs for the current quarter to $739 billion, and market participants expect officials to continue a short-dated issuance strategy in the coming months. Allianz Investment, which manages 598 billion (approximately $690 billion) in assets, favors a steeper yield curve trade, particularly going long on 5-year and 7-year Treasuries and shorting 30-year Treasuries, as they believe the Feds slightly dovish stance may put long-term Treasuries under pressure. Senior Portfolio Manager Ranjiv Manj said, The risk is that, in any rate-hiking cycle, the Fed may ultimately lag behind the curve, adding, You may see the anchoring of the long-end of the curve become a bit loose. And it's well known that the U.S. faces significant fiscal challenges. These concerns are reflected in pricing. Recent data shows that the term premium on 30-year Treasuriesthe extra yield investors require for holding long-term bondsrose to 1.56% this week, the highest level since 2013. Ronald Temple, Lazard's Head of Market Strategy for Asset Management, said in an interview this week, The trust background regarding the U.S. as a safe-haven asset is changing, surrounded by a lot of questions. Over the next few years, you will see the dollar resume its decline.