Key Highlights

• Concern has risen that U.S. financial assets could become less desirable abroad
• U.S. equities are out of favor as flows go to Europe
• U.S. bonds could come under pressure if foreign demand continues to wane

Equity demand moves out of the U.S. into Europe

EXHIBIT #1: U.S. EQUITY HOLDINGS DECLINE

^{Source: BNY Markets, iFlow}

By announcing sweeping tariffs, the U.S. is fundamentally changing its role in the global trading order. There are also uncertainties about the relative attractiveness of U.S. financial assets to overseas investors.  It’s only been a few days since the tariff announcement on April 1, and the volatility of financial assets may obscure clear conclusions at this early stage, but early implications shed some light on how international investors are treating U.S. equities, Treasurys and the dollar. Initial conclusions suggest an air of caution in cross-border investment flows.

Let’s start with equities. We have argued, with evidence (see here, for example), that there is waning demand for U.S. equities following a long period of outperformance through most of the post-pandemic period. Until late last year, that is. As Exhibit #1 shows, U.S. equity holdings have been in almost steady decline since early December last year. Our 2025 annual outlook foreshadowed an end to so-called American exceptionalism, and we have indeed observed this phenomenon quite clearly. While U.S. holdings have declined since the end of last year, there has been a clear shift in equity allocations to Europe. Of course, there has been an appreciable drawdown in equity exposure across the world since tariffs were announced, as both U.S. and Eurozone equities have repriced lower on the news. 
 
Again, we emphasize that it’s too early after the tariff storm has been unleashed to extrapolate short-term movements into long-term trends, but this is one that has persisted for a while, and one which makes a lot of sense. U.S. valuations had become stretched and market depth narrow, while growth prospects abroad were less ebullient – to say the least – than in the U.S. However, with tariff uncertainty now at its apex, and the effects on the U.S. relative the rest of the world equally uncertain, the unique attractiveness of U.S. assets is significantly diminished.

USTs still a concern

EXHIBIT #2: WHERE HAVE CROSS-BORDER INVESTORS GONE?

^{Source: BNY Markets, iFlow}

Overseas demand for U.S. Treasurys has been a key concern of ours, and something we watch closely. Exhibit #2 shows cumulative daily flows (a way of measuring longer-term movements in underlying demand) since the beginning of 2024. As the chart shows, outside of the resolution of the 2024 debt ceiling episode, when cross-border investors piled into new T-bill issuance, flows have been mixed at best over this period. Note, in particular, over the same period – early December last year – when equity flows left the U.S. and headed into the Eurozone, U.S. Treasury flows have been generally underwater. 
 
U.S. fiscal uncertainty is one plausible explanation, and again something we have been concerned about since the election. Extending the 2017 tax cuts will cost an estimated $4.5trn over the next 10 years, and it’s not clear that tariffs and budget cuts can offset the red ink from this policy. Static analysis suggests around $600bn per year will be raised from tariff revenues, but changing import behavior, declining domestic demand for higher priced and harder-to-source imports, and changing trade patterns could lead to merely half (or less) of that annual revenue actually being realized. 
 
Yields on bonds outside the United States are competitive. Furthermore, fixed income investors typically hedge their overseas sovereign exposure back to local currency. Hedging costs for covering UST investments back into euros, for example are now at their highest level since mid-2022, at 2.1% reduce the overall take-home yield on, say, a 10y US T-note paying 4.2% by around half, whereas 10y German Bunds currently yield 2.6% in local terms, without the bother and volatility of hedging.  
 
This is not to say that safe haven buying of USTs will no longer take place during times of market stress, and undoubtedly, the move in the 10y yield to below 4% at the end of last week was at least partially the result of a flight to safety. We have daily data on UST flows from abroad, shown in Exhibit #3. Thursday, April 3, the day after the tariff announcement, saw one of the biggest one-day inflows from abroad in several years. However, within a day, this flow had almost fully reversed and by yesterday was slightly negative. Total (i.e., cross-border and local) flows were still quite high on Friday, April  4 and Monday, April 7, but the absence of significant cross-border flow suggests it was primarily from U.S.-based investors.

EXHIBIT #3: A ONE-DAY RUSH INTO SAFE HAVENS, BUT PRECIOUS LITTLE OTHERWISE

^{Source: BNY Markets, iFlow}

These data are of great importance and something we monitor constantly. Tuesday’s barely passing 3-year auction and upcoming additional coupon placements the rest of this week could be illustrative of overall cross-border demand. The upcoming budget debate is also key, as we try to account for any increases in the deficit over the next several years. Our bias is to expect more – not less – red ink, potentially crimping demand from abroad.