Global Tax Accord and the U.S. Treasury Crossroads: Navigating Yield Risks in a Post-Section 899 World

The removal of Section 899 from the U.S. One Big Beautiful Bill Act (OBBB) marks a pivotal shift in global tax diplomacy, reshaping the calculus for investors in U.S. Treasuries. Treasury Secretary Scott Bessent's June 26 announcement of a G7 agreement to exempt U.S. firms from the OECD's 15% global minimum tax—while scrapping retaliatory “revenge taxes” under Section 899—has injected renewed optimism into bond markets. But beneath the surface, the interplay of tax policy, foreign investment flows, and Treasury auction dynamics presents a complex path forward. Here's what investors need to know.

The Tax Deal's Double-Edged Sword

The G7 accord, hailed by Bessent as a “historic achievement,” achieves two critical goals: it spares U.S. multinationals from foreign-imposed minimum taxes while eliminating Section 899's threat of punitive 15% withholding taxes on foreign holders of U.S. assets. This dual outcome removes a major deterrent for foreign investors, particularly in Treasuries. According to Treasury data, foreign holdings of U.S. government debt totaled $7.5 trillion as of Q1 2025, with Japan and China accounting for nearly 40%. The removal of Section 899's “revenge tax” could stabilize—or even reverse—a recent trend of reduced foreign buying, which had contributed to widening Treasury supply-demand imbalances.

But this relief comes with caveats. While the G7 agreement resolves one layer of uncertainty, it does not insulate Treasury markets from broader macro risks. The Fed's ongoing hawkish bias—projected to keep rates near 5.25% through 2025—continues to weigh on bond prices. Meanwhile, the U.S. budget deficit, expected to hit $1.5 trillion in 2025, will require record Treasury auctions. The question now is: Can foreign investors, freed from Section 899's cloud, offset the liquidity demands of these auctions?

Auction Sizes and the Demand Dilemma

The Treasury's 2025 auction calendar is daunting. With $1.2 trillion in new supply projected for the second half of the year, the market's ability to absorb this debt hinges on sustained foreign demand. Historically, foreign buyers have accounted for ~30-40% of Treasury purchases in auctions. But recent trends are worrisome: China's holdings fell to $850 billion in May 2025, a 15% drop from 2024, while Japanese buyers reduced their purchases in Q1. The removal of Section 899 could reverse this, but the jury is still out.

If foreign inflows rebound, Treasury yields might stabilize near current lows (~3.8% for the 10-year as of June). However, should demand falter—a risk if geopolitical tensions reignite or inflation proves sticky—the resulting supply glut could force yields higher. A 2023 example: When foreign buying of 7-year notes dropped 25%, yields spiked 40 basis points within weeks.

The Case for Short-Duration Plays and Inverse ETFs

Investors face a binary outcome: yields either remain anchored by foreign demand, or they rise due to supply pressures. To hedge this uncertainty, two strategies emerge:
1. Short-Term Treasury Exposure: Focus on maturities of 1-3 years, such as the iShares 1-3 Year Treasury Bond ETF (SHY). These bonds are less sensitive to rate hikes and offer capital preservation amid volatility.
2. Inverse Bond ETFs: Consider the ProShares UltraShort 20+ Year Treasury ETF (TBT), which profits from rising yields. A 100-basis-point yield increase could deliver ~20% gains, though these instruments require careful timing to avoid over-leverage.

Risks Lurking in the Shadows

While the G7 deal is a net positive, three risks remain:
- Fed Policy: A September 2025 rate hike—unlikely but not impossible—could spook bond markets.
- Geopolitical Volatility: Tensions with China or a resurgence in digital services tax disputes could reignite foreign investment caution.
- Structural Supply-Demand Mismatch: The $1.5 trillion deficit looms large. If the private sector cannot absorb auctions, the Fed's balance sheet—already at $9.5 trillion—may face renewed calls to intervene, a politically fraught path.

Conclusion: Navigating the Yield Crossroads

The removal of Section 899 has bought Treasury markets a reprieve, but the road ahead is littered with speed bumps. Investors should prioritize flexibility: hold short-dated Treasuries for safety while using inverse ETFs to speculate on yield volatility. As Bessent's G7 deal underscores, the era of tax-driven market swings is far from over. Stay vigilant—and diversified.