A generational shift in U.S. trade policy is prompting trading partners, who once found U.S. financial assets attractive, to increasingly look elsewhere for safe-haven assets or to seek the safety of cash, as they did during the pandemic.
While foreign purchases of Treasury securities remain stout, they have declined from a cyclical peak, with five-year bond yields falling since the beginning of the year.
Allotments on Wednesday’s five-year bond auctions increased but they remain soft—two-year debt allotments declined—and subject to risk because of the shift in trade policy, rising tensions around fiscal policy and the possibility of another debt-ceiling standoff.
As Congress debates another unfunded tax cut, global and domestic market participants may choose to push rates higher if it is interpreted as profligate fiscal policy.
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As the United States pulls back from being both the world’s lender and consumer of last resort, there is no guarantee that domestic and global investors will not demand a rising risk premium on U.S. paper along the maturity spectrum.
In addition, with the prospect of another U.S. debt ceiling standoff just over the horizon—possibly in late July or early August—it is rational that foreign investors demand a premium for purchasing U.S. Treasury notes.
