Investors Revisit 'Sell America' Trade on Fed Credibility, Yen Intervention Concerns

Global bond and currency investors are re-evaluating the case for a “sell America” trade following a series of significant economic policy decisions in Washington over the past two weeks. Concerns over the Federal Reserve's commitment to fighting inflation and a historic move to support the Japanese yen have introduced a new layer of policy uncertainty for U.S. assets.

Policy Shifts Rattle Markets

Two key developments are driving the renewed caution. First, investors are scrutinizing the communication style of Federal Reserve Chairman Kevin Warsh, which some market participants believe signals a wavering commitment to combating inflation, according to a report from Zhitong Finance. This concern is amplified by what the report describes as an unusual number of officials favoring immediate interest rate hikes.

Second, U.S. Treasury Secretary Besant approved American support for Japan's efforts to strengthen the yen, marking the first such coordinated action in nearly three decades. While the intervention was reportedly conducted using euros to minimize disruption to the U.S. Treasury market, the move is seen as a potential headwind for the dollar. These actions, combined with ongoing worries about the U.S. fiscal position and trade conflicts, are causing some investors to re-price American policy risk.

Diverging Market Signals

The reaction has been most pronounced in bond and currency markets, even as U.S. equities remain resilient with the S&P 500 touching record highs.

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• The 30-year U.S. Treasury yield has climbed above 5%, a level not seen since 2002.
• The term premium on 30-year bonds—the extra yield investors demand for holding long-term debt—rose to 1.56%, its highest since 2013.
• The U.S. dollar has weakened against nearly all G10 currencies over the past month, with the Bloomberg Dollar Spot Index falling about 2% from its June peak, despite higher Treasury yields that would typically provide support.

"Besant and Warsh are a double whammy for global markets that investors can't ignore," said Rajeev De Mello, a global macro portfolio manager at Gama Asset Management, who told Zhitong Finance he is selling U.S. Treasuries and the dollar due to the policy uncertainty.

The View from Abroad

While no one is predicting an end to the dollar's dominance, some global strategists warn that recent policy moves could erode the structural advantages of U.S. markets. Steve Brice, Global Chief Investment Officer at Standard Chartered's wealth management group, told the outlet he expects the dollar to fall by 3% to 4% over the next year, citing that "investors hate uncertainty."

However, the sentiment is not universally bearish. Data from the U.S. government shows foreign investors held $9.4 trillion in U.S. Treasuries as of May, a 4% year-over-year increase. Lotfi Karoui, a strategist at PIMCO, wrote in a report that a large-scale, coordinated sell-off has not materialized. He noted that days with simultaneous sell-offs in 10-year Treasuries, corporate credit, and the dollar have occurred on only about 2% of trading days this year, suggesting that a broad loss of faith in "American exceptionalism" is not yet evident.