The "Sell America" trade reignites! With the Federal Reserve losing credibility and the Treasury Secretary making a rare intervention in the yen, global capital is collectively fleeing U.S. bonds and the U.S. dollar.

According to Zhitong Finance App, following a series of economic policy decisions from Washington over the past two weeks, global bond and forex investors are discussing whether it's time to revive last year's "short America" trade.

First, Federal Reserve Chair Kevin Walsh's preference for sparse communication has led to doubts about the Fed's commitment to combating inflation, especially given the unusually large number of officials supporting an immediate rate hike.

Subsequently, U.S. Treasury Secretary Besant approved U.S.-backed measures to support the yen—the first coordinated effort of this kind in nearly 30 years. Although the intervention was carried out via the euro, in order to avoid disrupting the U.S. Treasury market, it still has the potential to pressure the dollar.

Due to concerns about fiscal conditions, trade wars, and ongoing conflict in the Middle East that could also prop up inflation, some in the markets are beginning to reassess their preference for U.S. Treasuries and the dollar, amid fears that U.S. policy is becoming difficult to interpret again.

The 30-year U.S. Treasury yield has risen above 5%, hitting its highest level since 2002, although it has trimmed some of its gains since the Fed meeting; meanwhile, the dollar has weakened against nearly all G10 currencies over the past month, despite rising U.S. yields (which would normally support the dollar).

Rajeev De Mello, Global Macro Portfolio Manager at Gamma Asset Management, stated, "Besant and Walsh have dealt a double blow to global markets, which investors cannot ignore." He is selling U.S. Treasuries and dollars, in part due to policy uncertainty.

He said: "They must now start to price policy risk into the dollar and Treasury yield curve. In fact, they're already doing this. This is the 'Trump Administration premium.'"

In April last year, when U.S. President Trump announced tariff hikes, triggering simultaneous selloffs of the dollar, stocks, and Treasuries, the "short America" trade gained traction. Although that move faded quickly, it challenged the assumption that the U.S. could indefinitely rely on the reserve currency status of the dollar and its deep capital markets to finance its ever-growing fiscal deficits.

This time, the situation is more nuanced. The U.S. stock market remains resilient, with tech gains pushing the S&P 500 to all-time highs. Fund flows also indicate continued trust in the U.S. According to U.S. government data, as of May, foreign investors held $9.4 trillion in Treasuries, up 4% year-on-year.

But in bond and forex markets, some global investors warn that without a clearer inflation strategy, the Fed could lose control over the debt market; and any direct U.S. support for the yen could weaken the dollar. If Japan, as the largest foreign holder of U.S. government debt, is forced to sell some of its over $1 trillion holdings to fund intervention, it could also reverberate through the Treasury market.

Carol Lai, fund manager at Saxo Financial Singapore, said: "This entire confusing set of messages does nothing to encourage capital inflows to the U.S." The firm holds a medium-term short position in the dollar.

She added: "The reality is, now that Besant has joined in and thinks the yen should probably be stronger, that helps our dollar logic, which is bearish on the dollar."

The Bloomberg Dollar Spot Index has fallen about 2% from its June high.

Strategist Skylar Montgomery Koning stated, "With Treasury yields already under pressure due to concerns about the Fed's anti-inflation credibility under Walsh's leadership, Washington has motivation to limit forced bond selling."

Besant defended U.S. support for the yen, noting that yen weakness carries the risk of broad-based depreciation for Asian currencies. He told the media on Tuesday that Washington "will go to any lengths" to support Tokyo in a way that benefits the U.S. economy and stabilizes global markets.

When asked about the reported use of euros to buy yen in Friday's intervention, Besant noted that U.S. officials remain in close contact with their European counterparts and told them the move was "merely a reallocation of our foreign exchange reserves."

This intervention has raised questions about the outlook for the dollar.

Steve Brice, Group Chief Investment Officer of Standard Chartered Bank Wealth Management, noted, "Investors hate uncertainty." He expects the dollar to fall about 3% to 4% over the next 12 months and points out that government actions and other factors are eroding the structural advantages of U.S. markets.

The “American Exception” Thesis

Admittedly, no one expects the dollar's dominance in the $9.5 trillion-a-day forex market to end or U.S. Treasuries' status as the global benchmark risk-free asset to falter.

Lotfi Karoui, Multi-Asset Credit Strategist at Pacific Investment Management Company, wrote in a report that U.S. assets remain broadly attractive to foreign buyers—a sign evidenced by the lack of major coordinated selling.

He said that only about 2% of trading days this year and rolling five-day periods have seen simultaneous selloffs in 10-year Treasuries, U.S. investment-grade credit spreads, and the dollar. "If people really lost faith in the 'American exception' thesis, we'd expect much more frequent selloffs of this kind."

But the issue is that their pace of purchasing hasn't kept up with the growth in U.S. borrowing. This week, the U.S. Treasury increased its estimated borrowing requirement for the current quarter to $739 billion, and market participants expect officials to continue emphasizing short-term issuance over the next few months.

Allianz Investment, which manages 598 billion euros (about $690 billion), prefers a yield curve steepening trade—specifically, going long 5- and 7-year Treasuries and short 30-year Treasuries—because they believe the Fed's slightly dovish stance could pressure long-dated bonds.

Ranjiv Mann, Senior Portfolio Manager at the investment management company, said: "The risk is, for any hiking cycle, the Fed could ultimately end up behind the curve. You could see the anchoring on the long end loosen somewhat. And it's well known that the U.S. faces significant fiscal challenges."

These concerns are being reflected in prices. Data show that the term premium on 30-year Treasuries—the extra yield investors demand for holding long-term bonds—rose this week to 1.56%, the highest since 2013.

Ronald Temple, Chief Market Strategist for Lazard Financial Advisory and Asset Management, said in an interview this week: "The trust backdrop for the U.S. as a safe haven asset is changing, and there are many questions swirling around it this week. In the next few years, you will see the dollar return to depreciation."