In a more inflationary world in the wake of the pandemic, an accelerating climate crisis, geopolitical conflict and the onshoring of supply chains, smart governments would get their fiscal house in order and look to global financial markets for stability and security. And the countries already with an advantage in that area would be doubling down and reaping the benefits of offering sanctuary in a more volatile world.
But the United States — the ultimate haven in the post-war world — has decided to upend that logic and instead offer chaos, economic stupidity and global turbulence as its key brand for investors. Other countries are responding by ditching the US.
In 2025, Donald Trump’s disordered economic policies fuelled what was called a “Sell America” trade: investors outside the US ditching US investments to avoid the uncertainty of the Mad King’s obsession with what turned out to be unlawful tariffs. Not so fast, America boosters countered — you should actually be part of the “Buy America” group instead.
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Through the rest of the year and into early 2026, financial markets seemed to adopt a more sanguine view of Trump’s debacles. But then in February came one they couldn’t ignore, with Trump being gulled by Israeli Prime Minister Benjamin Netanyahu into a disastrous war against Iran, one of the costliest geopolitical decisions since Russian President Vladimir Putin assumed he could seize Ukraine in a matter of days in 2022.
Seven months later, with the price of oil still around US$100 a barrel, Saudi pipelines in flames and the Iranian regime entrenched and eager to use its capacity to throttle oil supplies, the world now faces the possibility of depleted reserves and constrained supplies producing a genuine oil shock. This was a wholly unnecessary addition to existing drivers of inflation, pushing prices up globally and in the US.
Global oil prices are up more than 40% since the final day of February. Petrol prices have surged to more than US$4.40 a gallon in the US (in some states they topped US$5 a gallon), while diesel prices in the US are at record highs, hitting a monster US$6.50 a gallon. This is flowing through to the cost of transport, goods, farming, mining and other areas of industry. US consumer price inflation has jumped from 2.4% in February to 3.4% last month, and the yield on 10-year Treasury bonds briefly rose to 5% last week from 3.94% on February 27, the day before Trump and Israel attacked Iran.
The US Federal Reserve has already responded with one rate rise, and there are perhaps more to come. Trump’s decision to plunge into a wholly miscalculated war has become an inflationary sliding-doors moment. As AMP’s Shane Oliver said, “Were it not for Trump’s tariffs and war with Iran, the Fed may have cut again by now!”
The return of the “Sell America” trade has helped fuel the extended rise in bond yields, with foreign investors abandoning US bonds since the Iran debacle commenced. Total foreign holdings (both government and private) of US bonds fell to US$9.248 trillion in July, from the most recent high of US$9.487 trillion in February. Most of that selling came from governments and other official bodies, which hold around 40% of all foreign holdings of US bonds. Across 2025, foreign ownership of US bonds actually rose, but that came to a shuddering halt once the bombs began falling.
Total Japanese holdings — which account for around 30% of all foreign government ownership of US bonds — have fallen by more than 10%, fueled by a reversal of the decades-long yen carry trade that saw investors borrow dirt-cheap Japanese money to invest in more rewarding assets elsewhere, including Treasury bonds. With inflation returning to Japan — and a rapidly ageing population — Japanese investors are ditching the US and returning their money onshore.
The decline in Chinese holdings from US$694 billion to US$618 billion is of equal proportion. China has been selling off US bonds steadily since 2022 and the Russian invasion of Ukraine, as part of Xi Jinping’s effort to neutralise any Western points of leverage over China, but that process accelerated sharply after February. Compared with the all-time high of US$1.3 trillion recorded in November 2013, China’s US bond holdings have now fallen by 50% and are back to levels last seen in 2008.
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The fall has come as China has racked up trillions of dollars in trade surpluses, part of a successful campaign to diversify away from the increasingly hostile US market. Some of that surplus has been invested in gold and other assets, but some analysts wonder if more is being hidden offshore, such as with so-called third-party custodians like Euroclear in Belgium and Clearstream in Luxembourg.
Meanwhile, France, Canada, South Korea and the Saudis — whom Trump had refused to help against mounting Houthi attacks, once again demonstrating the contempt with which Trump treats allies other than Israel — have also cut back their exposure to US government debt since February. This decline in enthusiasm for US debt has meant the US Treasury has had to sell more bonds and bills (shorter duration borrowings of a year or less) into the huge US domestic market to make up for the lack of appetite among foreign buyers.
Markets are now expecting that Treasury Secretary Scott Bessent will resort to offering a trillion US dollars’ worth of Treasury bills, rather than bonds, over the next year to fund debt. By selling sub-one-year loans rather than longer-dated debt, Bessent is effectively gambling that interest rates won’t rise further. That will take the share of the shorter-term loans well above Treasury’s long-term goal, to levels only previously seen in the financial crisis and the pandemic.
If Trump’s forever war continues and delivers a genuine oil shock, Bessent’s gamble might leave him facing higher interest rates when US$1 trillion in Treasury bills mature from next year. And if the Iranians are somehow placated and oil starts flowing freely again, what’s the guarantee that Trump won’t find yet another way to demonstrate that the US is now the biggest problem in the global economy?
