The World's Losing Faith In America's Sacred Asset—And Wall Street Knows It

Something subtle, but significant, is happening beneath the surface of the U.S. financial landscape – foreigners are holding fewer Treasuries and more equities. To some, this might sound like a routine asset reshuffle, but it reflects a reassessment of how the world wants to be exposed to U.S. assets.

For decades, U.S. government bonds were the global comfort investment— liquid, safe, and, most importantly, apolitical. But that last part has started to fray. A combination of rising debt levels, repeated debt-ceiling standoffs, and the increasing use of financial sanctions has made even America's most holy asset feel a little less neutral.

The U.S. Department of the Treasury data shows that foreign investors are no longer treating Treasuries as untouchable. While overall demand for U.S. assets remains strong, more of that capital is now flowing into equities, especially large-cap tech and multinationals with global footprints.

This isn't about risk appetite suddenly soaring. It's about foreign holders hedging against political dysfunction and dollar weaponization by seeking growth and returns in U.S. equities rather than the perceived safety of government paper.

A Shift Within Institutional Thinking

Global asset managers are starting to frame the shift as more than just cyclical rotation. Franklin Templeton recently flagged the trend, noting their preference for international developed government bonds over US Treasuries.

"US debt is already substantial, exceeding US$36 trillion. The "Big Beautiful Bill" is projected to exacerbate this situation, according to the Congressional Budget Office, potentially leading to higher yields demanded by US Treasury buyers," their note said.

The firm pointed out that if tariffs reduce the US trade deficit with other countries, fewer foreign investment funds will be buying US Treasuries, and filling this gap will likely require higher yields.

UK Equities Sneak Onto The Radar

Interestingly, this rotation isn't just about the U.S. reshuffling its portfolio. It's also pushing investors to look outside the U.S. entirely — even at long-neglected markets.

Aberdeen Group recently bumped up its exposure to British high-yield stocks, dubbing this market a "rich hunting ground for income investors."

"UK stocks are cheap after years of weakness caused by macro concerns, but all the while, UK companies have been diligently taking action to improve their efficiency and grow their profits," noted Portfolio Manager Thomas Moore.

In a world of elevated rates and limited bond appeal, high-quality equity income looks pretty attractive again, and it doesn't take a lot of allocation to move the needle. "The FTSE All-Share (over 500 companies) totals $3.5 trillion," Moore said, comparing it to Apple's market cap of around $3.1 trillion.

The UK example shows the strengthening relative value argument. Instead of reaching for duration in an uncertain rate environment, allocators are tilting toward equities, particularly those with pricing power, dividends, and low relative valuations.

Private Credit Still Touts The U.S. Crown

Yet despite the rotation away from Treasuries, not everyone is ready to call time on U.S. dominance.

Muzinich & Co., a global asset manager with a focus on corporate and private credit, sees the shift as less of a rejection and more of a realignment. They argue that while public debt may be falling out of favor, the U.S. private credit market remains unrivaled in depth, structure, and access to high-quality cash flows.

"The data doesn't support the notion that the US is in decline. And while investors should always consider effective ways to diversify, the options remain limited. China is still largely closed to international capital.  Europe lacks meaningful duration and depth in fixed income markets," said Portfolio Manager Anthony DeMeo.

Despite an ongoing dynamic, DeMeo sees two catalysts for the new sources of structural demand – stablecoins and bank regulations. He pointed at Treasuries as a natural haven for crypto.

"The stablecoin market could become a significant buyer of Treasuries. Stablecoins must be backed by liquid, risk-free assets – namely, short-dated Treasuries. If adoption grows as projected, the resulting demand could exceed US$1 trillion by 2030, comfortably surpassing China's current holdings," he clarified.

Furthermore, he notes that the revision of the Supplementary Leverage Ratio could unlock as much as $5.9 trillion in balance sheet capacity for banks.

Whether it's pension funds in Canada or sovereign wealth funds in the Middle East, the demand for U.S. risk assets is alive and well, just not in the same form it once was. So while Treasuries lose some of their mystique, U.S. equities and credit markets are stepping into the vacuum.

Less power to bureaucrats, more to the public market. At sky-high valuations, this may sound like a risky recipe.

Yet, this rebalancing says a lot about how foreign investors are preparing for a world with higher rates, greater volatility, and more political complexity — both inside the U.S. and out.

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