In a remarkably short time, the US has shifted from a source of global stability to uncertainty. That all-important characteristic: credibility, once lost, is difficult to regain, making sustained capital inflow unlikely.
We only have to look at the UK’s 2022 gilt-market panic under Liz Truss to see how fragile economic credibility can lead to lasting volatility.
In a similar way, America seems to have lost much of its credibility under President Trump.
One only has to look at the term premium on US treasury yields, reflecting the extra compensation required for holding long-term bonds, reaching its highest level in more than a decade. This could rise at least another 25 basis points.
It highlights the precarious nature of some US investments, with a drop in US treasuries and the dollar.
This is now a real concern for some investors. “The US faces heightened risk due to high borrowing needs, with $2trn (£1.5trn) in new debt and $8trn in rollovers expected this year,” said Mickael Benhaim, head of fixed income strategy and solutions at Pictet Asset Management.
And he added: “Weak treasury auctions and potential higher yields could worsen debt dynamics, with a 0.1% annual yield increase adding $350bn to deficits by 2035. Tax cuts and slowing tax receipts further strain fiscal balance.”
Although Benhaim was keen to note that the US will not lose its haven status overnight due to the unmatched liquidity of its currency and treasuries.
However, he added: “Investors are likely to gradually diversify portfolios, favoring German bunds, gold, emerging market bonds and high-quality credit.”
Stable yields on bunds and record gold prices signal growing interest in alternatives, Benhaim said.
“Emerging markets, with stable fiscal positions and lower inflation, offer attractive opportunities,” he added.
And worse, for many US assets, the damage has already been done. “Trump’s tariff policies have already damaged US assets, pushing investors to seek alternatives,” Benhaim added.
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