U.S. bonds, stocks, and the dollar are all declining simultaneously, and all appear to be on shaky ground. This unusual situation has become so concerning that even the Federal Reserve felt compelled to declare that it has the means to address it. Such a scenario is highly abnormal. Under typical circumstances, capital flows in opposite directions between the stock and bond markets. When equities fall, bonds usually rise. A broad and coordinated selloff across all major U.S. assets usually signals one thing: a mass exodus from dollar-denominated assets. Investors sell rather than buy as long as it is tied to the U.S. dollar. Market depth indicators for the bond market show the same thing. The appeal of large-scale trades in U.S. bond is currently about 80% lower than usual. Market volatility indicators tell a similar story. It seems the global market has lost interest in dollar assets altogether.
It should be pointed out that this situation is not solely caused by tariffs. Information analysis is a form of tracking-based research, and we observed some peculiar indications in the dollar asset market as early as around the 2025 Munich Security Conference (MSC).
Since December of last year, the U.S. bond market has been on a steady decline. The yield on the 10-year Treasury began rising from around 4.15%, gradually pushing it to a 14-month high. At one point, the 10-year Treasury yield reached 4.791%. After JD Vance publicly highlighted the tensions between the U.S. and Europe at the MSC, the market has developed to the current state where the focus in the Treasury market has shifted to whether the 10-year yield will break through the 5% threshold.
The rise in U.S. Treasury yields proves that demand for the U.S. Treasuries is decreasing and liquidity is worsening. Yields typically move inversely to the price of bond assets, so the rise in yields and their sustained high levels indicate that U.S. Treasury assets are being ignored. As the buying price keeps dropping, bond assets are becoming cheaper. It seems the entire dollar asset market is a horror story first told by Europeans and heavily supported by Wall Street. Not only are dollar-denominated assets seeing fewer buyers, but U.S. stocks are also falling, and the U.S. dollar is depreciating. In fact, the exchange rates of all G10 currencies are rising, while the dollar is depreciating against them. Data from April shows that the depreciation has reached about 0.9%. This situation is almost unbelievable, signaling that many countries, led by European investors, have lost confidence in dollar assets.
It should be pointed out that it is not only European investors having this sentiment, the same also goes to investors on Wall Street. Larry Fink, the CEO of BlackRock, recently admitted that European investors are resetting their assets. They lack confidence in Trump's policies and are uncertain about the future direction of the U.S., which is why they are considering reallocating into European assets. Fink acknowledged that BlackRock is doing the same. They are also selling off dollar-denominated assets and reallocating into European assets. Perhaps, those “people on Wall Street” have never truly been “patriots” of the U.S. They are typical capitalists, and now they are following the Europeans, moving away from dollar assets and heading towards Europe, towards euro-denominated assets. At least a portion of their capital and investors are doing so.
From the United States to Europe, investors are shifting their assets across continents, which in essence represents a geopolitical financial war. The current Trump administration is under significant pressure. On one hand, both Treasury auctions held earlier this year failed to meet expectations. Yields on U.S. Treasuries have surged, and hedge funds are reducing their positions, signaling growing market anxiety about rising interest rates. On the other hand, weak demand from international markets and the potential risk that some countries may reduce their holdings of U.S. debt are also unsettling investors. They are not optimistic about Trump’s “reciprocal tariffs” and, in some cases, are openly voicing sharp criticism. Seema Shah, Chief Global Strategist at Principal Asset Management, explicitly pointed out that the intense volatility in the bond market “struck a nerve with the Trump administration”. She stated: “They (the Trump administration) have repeatedly emphasized their focus on bond yields and even celebrated last week when Treasury bond yields dipped below 4%. Low financing costs appear to be a key pillar of the Trump administration’s overall agenda, so the reversal in market trends (surging Treasury yields) undoubtedly caused significant concern in the White House”.
Trump’s current predicament is indeed dire, but that is not primarily due to the tariff war between the U.S. and China. While the Chinese government holds a significant amount of U.S. debt, among the highest in the world, its share within the broader Treasury market is relatively small. China accounts for only 11.8% of foreign-held U.S. debt, and just 2.77% of the total U.S. debt, which means its influence is limited overall. The real issue lies in global geopolitics and the ideological conflict between the U.S. and Europe. As we have pointed out in multiple occasions, the primary contradiction in today’s world is between America’s conservative ideology and the progressive ideology embraced by Europe. In other words, the U.S. presidential election ended with a Republican victory, bringing Trump to power. But in Europe, this ideological contest is still ongoing, and it is fierce and ruthless. Therefore, the financial struggle between the U.S. and Europe, the battle to attract global capital, is essentially a geopolitical financial war. Whether Trump will ultimately lose this war, raise the white flag, abandon his “reciprocal tariffs”, and allow the Europeans to regain the upper hand and continue playing the dominant role in the global order, remains uncertain. Right now, the odds appear to be no better than fifty-fifty.
If Trump wants to overpower the Europeans, both at the level of European governments and European markets, this will be especially challenging, especially given that the Fed is still reluctant to fully cooperate. Citibank has proposed a four-point solution, which includes: exempting the supplementary leverage ratio, halting quantitative tightening, adjusting the Treasury repurchase program, and eliminating the 20-year Treasury bond. Clearly, these are technical recommendations offered from the Fed’s perspective. However, from the standpoint of a geopolitical financial war, what would be the most advantageous course of action for Trump?
First, Trump could abandon intervening in the war in Ukraine. After all, Volodymyr Zelenskyy is not interested in seeing "peace" in Ukraine, so the U.S. might as well give up its nearly one-sided peace efforts, refusing to let Europe “free ride”. This would force the Europeans to solve their own problems and fulfill their commitments to Ukraine. Such a decision would effectively prolong the war in Ukraine, and Europe’s expectations of its capital markets would soon evaporate. Funds would inevitably flow back into dollar-denominated assets.
Second, adjustments to the tariff war should enter a more stable and predictable phase. This means Trump would need to reaffirm that the baseline tariff rate is 10%, which is his established target. In fact, any tariffs above 10% would be seen as driven by emotion rather than geopolitical or international economic considerations. This move would have only negative consequences, with few positive effects. However, a 10% tariff, as a modification of the post-World War II global tariff order, could still be comprehended by countries around the world, with relatively limited impacts on the supply chain. For the Republican political agenda, this would already be effective enough, contributing to the return of manufacturing.
Third, Trump should push the Fed to play a more active role. This includes increasing the purchase of U.S. Treasuries, releasing U.S. dollar liquidity, and ensuring the stability of the dollar order. Additionally, the Fed should drive up gold prices, forcing the outflow of dollar assets to have nowhere to go and no safe haven to find, potentially even leading to relative depreciation. Given the current urgent situation, the Fed's potential interest rate cuts this year are now in question, and this issue will undoubtedly be discussed more in the future.
Although Trump finds himself in a precarious position, facing severe internal and external pressure, he still has cards to play in this geopolitical financial war. Even if U.S. Treasuries are struggling, they are still far stronger than European or Japanese debt. Europe’s progressive forces, both in government and the market, might exaggerate and mislead the capital markets, stirring up uncertainty and pushing funds away from dollar assets. However, when looking at global geopolitics and the geographical layout of capital markets, the U.S. market, anchored on the American continent, remains the most stable. After all, regardless of whether or not American manufacturing returns successfully, it will still be U.S. manufacturing, not Europe’s, and not Japan’s.
With all these in mind, figures like those from Wall Street, Larry Fink, and Ray Dalio may not necessarily be right. The U.S. might not actually lose this geopolitical financial war.
