INTRODUCTION

The second quarter of 2025 underscored a pivotal shift in the global economic and financial landscape. The era of U.S. exceptionalism appears to be waning amid mounting concerns over the sustainability of global growth, as central banks outside the Federal Reserve adopt easing measures and trade negotiations remain unresolved. Simultaneously, geopolitical tensions – including the ongoing conflicts in Ukraine and the Middle East – have intensified defense spending and led to sustained elevated volatility in commodity prices, further complicating an already difficult market environment.

Against this backdrop, the relative calm in equity markets contrasts with heightened volatility in bond markets, placing debt dynamics and the intersection of geopolitical and economic risks at the forefront of investor focus heading into the third quarter. Our proprietary iFlow data provides a unique lens into these developments, revealing critical trends in currency flows, hedging behaviors, and cross-border asset allocation.

In this report, we look at the following key themes:

• The limits of the U.S.’ ability to run budget deficits. The evolving challenges of U.S. government debt management highlight the diminishing returns on borrowing and the complex tradeoffs between growth, inflation and debt.

• Increased risk of steeper yield curves. The heightened risks in U.S. and global bond markets are characterized by rising yields, shifting investor demand and the potential for increased risk premia, particularly in longer-dated instruments.

• Fiscal constraints temper LatAm carry appeal. Despite a Q2 rebound in flows driven by tariff relief, commodity support, and attractive real rate spreads, investor concerns persist around fiscal discipline, especially in Brazil and Colombia, where central bank hikes and election risks loom. Argentina’s policy shift has improved stability, but fiscal policy remains a key regional risk factor.

• Limits to EUR gains, despite ongoing USD weakness. The prospects of the euro as a reserve currency alternative are dim, as structural economic and asset market foundations still require significant strengthening despite positive policy initiatives within the Eurozone.

• Ongoing pressure for Asian FX and bond adjustments. There has been volatility amid policy responses in APAC sovereign bond markets, where central banks are navigating the dual pressures of rising yields and domestic economic uncertainties, with notable divergences between Japan’s yield curve management and China’s disinflationary environment.

This report also offers detailed macroeconomic outlooks for key regions including the U.S., EMEA, and APAC, alongside forward-looking market forecasts from our expert strategy team. These insights aim to provide investors and market participants with a nuanced understanding of the risks and opportunities shaping the global financial system as we move into the second half of 2025. 

EXHIBIT #1: RATIO OF DEBT GROWTH

_Disclaimers: 

<sub>iFlow® / FX MARKET COMMENTARY

The products and services described herein may contain or include certain “forecast” statements that may reflect possible future events based on current expectations. Forecast statements are neither historical facts nor assurances of future performance. Forecast statements typically include, and are not limited to, words such as “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “likely,” “may,” “plan,” “project,” “should,” “will,” or other similar terminology and should NOT be relied upon as accurate indications of future performance or events. Because forecast statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict.</sub>

_{iFlow® is a registered trademark of The Bank of New York Mellon Corporation under the laws of the United States of America and other countries. iFlow captures select data flows from the firm’s base of assets under custody, as well as from its trading activity with non-custody clients, on an anonymized and aggregated basis.}

_BNY

_{BNY is the corporate brand of The Bank of New York Mellon Corporation and may be used to reference the corporation as a whole and/or its various subsidiaries generally. This material does not constitute a recommendation by BNY of any kind. The information herein is not intended to provide tax, legal, investment, accounting, financial or other professional advice on any matter, and should not be used or relied upon as such. The views expressed within this material are those of the contributors and not necessarily those of BNY. BNY has not independently verified the information contained in this material and makes no representation as to the accuracy, completeness, timeliness, merchantability or fitness for a specific purpose of the information provided in this material. BNY assumes no direct or consequential liability for any errors in or reliance upon this material.}

_{This material may not be reproduced or disseminated in any form without the express prior written permission of BNY. BNY will not be responsible for updating any information contained within this material and opinions and information contained herein are subject to change without notice. Trademarks, service marks, logos and other intellectual property marks belong to their respective owners.}

_{© 2025 The Bank of New York Mellon. All rights reserved. Member FDIC.}