Global investors don't trust the U.S.
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Treasury bonds and other U.S. dollar assets have acted as a global safe haven for generations. This week, global investors woke up to the possibility that they are not particularly safe, and not at all a haven.
The big picture: The last nine days will reverberate through economic history, as the kind of shifts in the global trade order and financial markets that usually play out over years were compressed into each news cycle.
- People will write books about April 2025 the way they have about July 1944, August 1971 or September 2008.
- The moves in trade policy have been dramatic, with the world's two largest economies now taxing each other's imports at over 100%. If sustained, this would essentially shut down commerce between the U.S. and China.
- But it's the curious way bond and currency markets have interacted that gives the most alarm about the trajectory of global confidence in the U.S.-centric financial order that has prevailed since the end of World War II.
State of play: In a week that stocks and other risky assets sold off, so did U.S. Treasury bonds and the U.S. dollar.
- This is not normal. In past episodes of extreme tumult, like September 2008 and the early days of the pandemic in 2020, the dollar rallied as global investors sought safety.
- A key element of those crises was, in effect, a global shortage of dollars so severe that the Federal Reserve had to intervene to satiate demand, through global swap lines and emergency lending to U.S. banks. No such shortages this time around.
- Trading this week has displayed a "rare, ugly and worrying combination of market moves," Krishna Guha with Evercore ISI wrote.
By the numbers: The yield on the 10-year U.S. Treasury note was 4.57% as of 11am ET Friday. That level is not worrying (rates were higher as recently as January) but the speed and direction of travel are.
- The 10-year yield was under 4% one week ago.
- Meanwhile, the dollar index — the dollar's value versus six other major currencies — is down 3.4% since Tuesday and 9.2% since mid-January. Those are massive swings by the standard of the most liquid global currency markets.
Between the lines: It suggests that erratic leadership, ballooning fiscal deficits, and rapidly eroding diplomatic ties are making global investors wary of being too exposed to the United States.
What they're saying: The market, Deutsche Bank currency strategist George Saravelos wrote, "is re-assessing the structural attractiveness of the dollar as the world's global reserve currency and is undergoing a process of rapid de-dollarization."
Of note: It kind of got lost in the news shuffle given the trade and market shifts, but also this week the House passed a budget blueprint that lays the groundwork to extend President Trump's 2017 tax cuts.
- It allows Congress to raise fiscal deficits by up to $5.8 trillion over the next decade, relative to current law under which those tax cuts expire at year-end.
- The Capitol Hill action wasn't an apparent catalyst for the bond market moves. Still, it underscores the risks investors are taking by lending to a nation with already high deficits and debt.
Zoom out: In the near term, it implies that investors can't benefit from the usual shelter-in-the-storm effect. If you have a portfolio of both stocks and bonds, it helps if one zigs while the other zags, but that hasn't happened this week.
- In the medium term, it could mean structurally higher U.S. interest rates and more market pressure to reduce deficits.
- In the long term, if this really does prove to be the start of a reshuffling of the global economic order, trade, and financial flows, the implications are so sweeping that they're hard to even predict.
The bottom line: Markets can behave weirdly, and maybe this will turn out to be just a few bumpy trading days. But the world's most important financial markets — for the dollar and Treasury securities — are signaling that something fundamental is shifting beneath our feet.
