There's a looming crunch for U.S. assets that are dependent on foreign investors - who may wait until next year to act, a strategist says.
Standard Chartered Bank's Steve Englander, head of global G10 FX research and North American strategy, says 2026 will be the crunch year when foreign investors will decide if burgeoning debts are worth funding.
In the last decade, U.S. external indebtedness has increased dramatically, as the accompanying chart shows.
This reliance on international investors to fund the increase in U.S. government debt means any reluctance on their behalf to buy U.S. Treasury securities or the dollar will be felt painfully and rapidly.
Though it's been somewhat volatile, the yield on the benchmark 10-year Treasury BX:TMUBMUSD10Y has declined by 15 basis points this year. The U.S. dollar index DXY, by contrast, has dropped 8% in 2025.
The concerns about fiscal sustainability have not yet been alleviated by the 'big, beautiful bill' that passed through the Senate last week as many economists believe it will add to the deficit rather than address it.
These concerns will likely result in rising risk premia for the dollar and U.S. bonds so even if the currency weakens further, theoretically making them cheaper for international investors, they may be reluctant to allocate there. Maintaining the confidence of non-U.S. investors is of paramount importance to Treasury Secretary Scott Bessent because domestic investors are not saving, as illustrated by this chart
While U.S. national debt has been rising inexorably for decades, the point at which it becomes a crisis is hard to pinpoint. Englander cites Hemingway's famous line of "gradually, then suddenly." America could remain on the gradual path for an extended period, quite possibly forever' but Englander thinks the crunch will come in 2026.
For overseas investors to fund the U.S. deficit, they need to be comfortable that investment returns won't be eroded by inflation or currency weakness. Englander makes the point that even if the Fed eases monetary policy, that it may not have the usual effect of lowering rates at the long end of the Treasury curve if foreign buyers are dissuaded by rising risk premia. In April, higher rates did not serve to bolster the dollar like it has typically done in the past, indicating a lack of conviction on behalf of overseas investors.
What may delay a crunch in dollar assets is the lack of convincing alternatives, making those international investors hesitant to dump U.S. assets. They may be persuaded to wait and see how the tariff wars evolve and the Trump administration's tax and deregulation package is received over the course of 2025, says Englander.
-Jules Rimmer
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