U.S. bond giant PIMCO said protectionism in U.S. trade policy strengthened the case for dialing down exposure to the U.S. dollar and long-dated Treasury bonds, while greater reliance on foreign bond markets had become more attractive.
U.S. President Donald Trump's tariffs have rocked financial markets and triggered a violent selloff last week in Treasuries and the dollar that cast fresh doubt on the long-held belief in the safe-haven status of U.S. assets.
"With its protectionist policy pivots, the U.S. is giving investors worldwide an occasion to rethink long-held assumptions about the U.S. investment landscape," Marc Seidner, chief investment officer for non-traditional strategies, and Pramol Dhawan, head of emerging market portfolio management at PIMCO, said in a note on Thursday.
"The U.S. has long enjoyed a privileged position, with the dollar serving as the global reserve currency and Treasuries as the go-to reserve asset. However, this status is not guaranteed," they said. "If global capital flows into U.S. assets dwindle, it could point toward a more multipolar world with a diminished reliance on a singular reserve currency."
California-based PIMCO, which manages about $2 trillion in assets, said the recent selloff, which saw parallel drops in U.S. equities, the dollar, and Treasuries, mirrored dynamics typically associated with emerging market economies.
The change in global trade dynamics spurred by Trump's policies could dampen capital flows into the country, bolstering the case to be underweight, or hold a bearish stance, on the U.S. dollar, Seidner and Dhawan said in the note.
At the same time, they said, long-dated foreign government bonds in Europe, the UK, Japan, or emerging markets, appeared attractive alternatives to U.S. Treasuries.
"Rapid U.S. policy changes pose challenges for investors accustomed to a global financial system anchored in U.S. markets and assets," said Seidner and Dhawan.
"The breakdown of longstanding global correlations could be painful for a global investor, who may be left wondering how many U.S. assets to own," they added.
