Despite concerns over ballooning budget deficits and the White House's attacks on the Federal Reserve's monetary policy independence, coupled with Donald Trump's aggressive policies undermining the long-held belief in "American exceptionalism," US Treasuries have rebounded strongly in the second half of the year, reinforcing their dominance as the world's most trusted sovereign debt asset.

Since Trump's return to the White House, the core status of US bonds in global markets has repeatedly been questioned. From sweeping tariff policies and tax cuts to massive budget deficits and Trump's persistent criticism of the Fed, Wall Street's top investment firms have sounded alarms about the end of "American exceptionalism," advocating "Sell America"—particularly US Treasuries facing fiscal pressures and inflation risks.

Yet, global investors continue to flock to US sovereign debt, driving a major rally. Institutions publicly declaring the "collapse of American exceptionalism" are secretly buying Treasuries at high yields. Falling "term premiums" and expectations of Fed rate cuts have boosted returns, while the worst economic forecasts have failed to materialize.

The $30 trillion US Treasury market remains robust, with year-to-date returns nearing 6%, on track for the best performance since 2020.

**Why the Surge in Demand?** 1. **Inflation Control**: High Fed rates have kept inflation in check, with businesses absorbing most tariff costs rather than passing them to consumers. 2. **Fiscal Adjustments**: The Treasury shifted to short-term debt issuance, while Trump's administration slashed federal payrolls and pledged deficit reduction. 3. **Fed Rate Cuts**: Two consecutive rate cuts have buoyed the economy, with further easing expected.

Top bond investors like TCW's Ruben Hovhannisyan and PIMCO's Daniel Ivascyn argue that the US remains the "cleanest dirty shirt" among major economies—despite fiscal challenges, it outperforms peers with deeper dysfunction.

**Market Dynamics** - The 10-year Treasury yield has dropped ~50 bps to ~4%, easing fiscal pressures and borrowing costs. - Foreign holdings hit a record $9.2 trillion by July, suppressing yields despite dollar-hedging trends. - The "term premium" for long-term bonds has cooled, nearing April lows.

**Risks Ahead** - **Trade Wars**: Escalating tariffs could tip the US into recession, spurring safe-haven flows. - **Inflation Resurgence**: Weak jobs data might reignite price pressures, undermining the bullish case. - **Fed Uncertainty**: Chair Jerome Powell pushed back against December rate-cut expectations, triggering brief sell-offs.

**Outlook** With the Fed poised for further easing and global alternatives faltering (e.g., Europe’s stalled cuts, Japan’s potential hikes), US Treasuries retain their appeal. As PIMCO’s Ivascyn notes, declining cash returns and rising credit risks elsewhere will drive demand for high-quality fixed income—like 10-year Treasuries.

**Missed Opportunities** Active bond funds trailing the Bloomberg USAgg Index (62% underperforming YTD) highlight the cost of underestimating the rally. Columbia Threadneedle’s Ed Al-Hussainy reflects: "If you shorted at 5% in January, today’s 4% yield is painful. You missed a stellar run—but that’s hindsight."