Key Highlights

• Bonds: AAA alone is insufficient for safety flows
• FX: EUR has reversed the reversal
• Equities: Cross-border investors now underweight U.S. tech

Despite interest in alternative havens, sovereign bonds of AAA-rated names performing poorly

EXHIBIT #1: SMOOTHED MONTHLY FLOW FOR SWEDEN AND AUSTRALIAN GOVERNMENT BONDS

^{Source: BNY}

Recent developments in U.S. Treasury markets have ignited a discussion on alternative reserve assets, especially for asset managers with a mandate to invest only in highly rated government securities. However, this is easier said than done. Our data shows that there has been very limited inflow to the highest-rated assets. For example, Australia and Sweden government debt are rated AAA with a stable outlook by all three major agencies. Yet, Exhibit #1 shows that both have performed poorly year-to-date, and events since April have generated limited marginal demand.

Our take

Despite elevated volatility this month, the U.S. Treasury Market is unmatched in depth and liquidity. AAA-rated economies, by definition, have large domestic savings that generate high home bias. This means cross-border investors have limited pricing power in these assets, which reduces their attractiveness.

Forward look

There is no alternative to the U.S. Treasury Market. For now, investors should not see price drops in U.S. assets as an indication of status decline. Our data clearly shows that there are no direct beneficiaries of recent softness in U.S. Treasury markets, especially among developed market sovereign bonds. At best, non-dollar cash equivalents can benefit in the near-term, which is being reflected in dollar weakness. The same investors may return to U.S. Treasury markets if sufficient value emerges. Our data already shows growing external demand for U.S. Treasurys with maturities of 10 years or longer.

Euro sales picking up as Q1 2025 fully offsets Q4 2024

EXHIBIT #2: CROSS-BORDER FLOWS AND HOLDINGS IN EURO

^Source:BNY

We have long highlighted the risk of an EUR surge due to excessive hedging by cross-border investors. At the end of 2024, economic and political risk had pushed cross-border holdings to the lowest levels in almost 20 years. Unwinding of these positions helped accelerate the euro’s recovery. Our data showed near-unbroken purchases through the first quarter as positioning reversed.

Our take

As of Q2 2025, the EUR’s cross-border holdings score has normalized to the rolling one-year average. This means that there is no positioning support for euro flow in either direction, clearing the way for fundamentals to become the main driver of the currency. Our data shows that so far in April, flow has heavily favored EUR sales. This suggests that Q2 could mark a reversal of the EUR’s behavior in Q1, which itself was a reversal of flow trends in Q4 2024.

Forward look

We believe the euro has overshot. Data is showing sharp deterioration in economic expectations. Crucially, inflation figures have started to surprise to the downside, which a strong currency would aggravate. If U.S. tariffs on European Union exports are reinstated in July, it would represent an imposed effective exchange rate (EER) appreciation on the EUR. Consequently, we believe the European Central Bank (ECB) will start to lean against euro strength. The market has already pivoted back towards pricing in terminal rates closer to 1.50%. Strengthening rate cut expectations aside, President Lagarde may choose to start verbal warnings on euro levels at this week’s policy decision.

International investors’ tech holdings fall sharply in last six months

EXHIBIT #3: CROSS-BORDER INVESTORS IN U.S. TECH VS. U.S. EQUITY AGGREGATE

^{Source:Bloomberg, BNY}

The U.S. Government has announced some tariff exemptions for the tech sector this week, but our data indicates that general positioning in related sectors in U.S. equities continue to struggle. After significantly adding to their holdings of U.S. technology and communication services equities in Q4, cross-border investors are now underweight in these sectors relative to the broader index. This is also the first time in two years that both holdings categories have fallen below the 1-year holdings average. 

Our take

Cross-border investors were willing participants in the U.S. exceptionalism story, where technology and communications stocks were expected to continue delivering strong earnings growth while maintaining high margins on a relative and absolute basis. However, many of these companies are exposed to overseas earnings, supply chains and regulation risk.Recent developments have injected significant volatility into the U.S. exceptionalism narrative. Despite a high likelihood of concentrated holdings in this sector, we do not detect any sign that cross-border investors are liquidating their U.S. tech holdings due to overall exposure. In other words, international asset owners are not de-rating these sectors.

Forward look

The biggest risk to growth sectors in U.S. equities remains a repeat of 2022. At the time, valuations adjusted due to aggressive Federal Reserve rate hikes in response to inflation, which in part was driven by supply chain difficulties. While the inflation outlook is highly volatile at present, supply chain pressures are building again, albeit with different catalysts. For now, markets are not expecting a repeat of 2022 because the Federal Reserve is at a different point in the cycle. However, there is no guarantee that inflation can fall enough for the Fed to provide sufficient easing. Should financial conditions fail to ease, coupled with the prospect of a dollar that is weaker for longer, the return profile for U.S. equities will struggle to improve for international investors, especially in tech where valuations remain high relative to global peers.

Bottom Line

We do not support the theses that international investors are turning their backs on U.S. assets. There are no signs of strong inflows into potential developed market sovereign bond markets at the expense of U.S. Treasury securities. The euro’s performance is looking excessive and will face pushback from the ECB, thereby offering some relief for the dollar. In contrast, momentum continues to favor holdings reduction in U.S. equity markets, especially in tech and communication sectors. Cross-border flow will remain defensive in this market until trade certainty is established, supported by a clear easing bias from the Federal Reserve.