The Capital Flight: A Structural Reassessment of US Asset Premiums

The recent selloff is not a mere market correction. It is a structural capital reallocation, a defining feature of 2026 as the 'Sell America' trade returns with renewed force. This is a reassessment driven by a convergence of threats to the very foundations of the US asset premium: central bank independence, trade stability, and US global leadership. Capital is flowing toward alternatives amid rising policy uncertainty and accelerating de-dollarization.

The first pillar of this reassessment is the unprecedented assault on the Federal Reserve's independence. The Justice Department's criminal subpoena of Chair Jerome Powell last week represents a direct threat to a cornerstone of financial stability. This action, framed as a response to testimony on building renovations, is widely seen as a pretext for targeting the Fed's monetary policy decisions. When the central bank's ability to set rates based on economic data rather than political pressure is questioned, the entire credibility of US monetary policy shifts. Markets have responded with immediate volatility, as the reassessment of monetary credibility alters how capital values US assets from bonds to equities.

Simultaneously, geopolitical posturing is straining alliances and raising the cost of US leadership. The White House's renewed tariff threats against European allies, coupled with its assertive stance on issues like Greenland, have triggered a broad selloff across US stocks and government bonds. Investors are dumping dollar assets, citing fears of prolonged uncertainty, a loss of confidence in US leadership, and the acceleration of de-dollarization trends. This is not isolated trade friction; it is a signal that the strategic direction of the US is becoming a material risk factor in global portfolio strategy.

The bottom line is that legal, monetary, geopolitical, and trade developments are now intersecting in ways that materially change how risk is priced. What once sat at the edges of institutional thinking has moved to the center. The selloff is a market signal that confidence in governance and policy stability is weakening, forcing a fundamental reassessment of the US asset premium in a world where alternatives are gaining appeal.

Market Signals: Divergence in Yields, Dollar, and Equity Volatility

The reassessment of US asset premiums is now translating into clear, divergent moves across the financial spectrum. Capital flight is not a uniform selloff; it is a strategic reallocation that is creating conflicting pressures in bonds, equities, and the dollar.

The broadest signal is in the greenback itself. The dollar index has fallen to 98.891, its lowest level since mid-January. This retreat is a direct flight from dollar assets, driven by fears of prolonged uncertainty and a loss of confidence in US leadership. The move underscores that the geopolitical and policy risks are now outweighing traditional safe-haven flows, accelerating de-dollarization trends as investors seek alternatives.

In the bond market, we see a tug-of-war between fundamental data and geopolitical risk. Treasury yields rose on solid labor market data, as improving jobless claims lowered expectations for imminent Fed rate cuts. Yet this move was constrained by the very uncertainty that is driving the dollar down. The conflicting pressures highlight a market in two minds: it is pricing in a resilient economy while simultaneously discounting the long-term stability of US monetary policy. The result is a yield curve that reflects both economic strength and a growing risk premium.

Equity markets are the most volatile barometer of this tension. The S&P 500 has shown sharp volatility, with recent sessions marked by significant swings. This choppiness is the direct result of the intensifying trade and geopolitical posturing. As the "Sell America" narrative gains traction, it injects persistent uncertainty into earnings forecasts and valuation models, making the market prone to large, sentiment-driven moves.

The bottom line is a market in disequilibrium. The dollar is weakening, bonds are yielding higher on conflicting signals, and stocks are swinging wildly. This divergence is the financial market's clearest signal that the structural reassessment is underway, and capital is actively seeking shelter from the perceived gathering storm around US assets.

Forward-Looking Scenarios: The Path for Yields, Growth, and Volatility

The structural reassessment is now setting the stage for a volatile and divergent year. The competing forces of robust near-term growth and rising policy uncertainty will shape the trajectory of key financial metrics, creating a setup where traditional relationships are likely to break down.

The clearest directional call is for bond yields. Long-maturity, high-quality government bond yields are expected to rise substantially, with the U.S. Treasury yield curve steepening notably from cash. This isn't just a function of current economic data; it's a response to a fundamental shift in the global capital landscape. As almost every government continues to issue debt to finance deficits, and with a flood of AI-related debt supply, the competition for capital will remain intense. The result will be persistent upward pressure on long-term yields. The current spread between cash rates and the 10-year Treasury, at just over 30 basis points, looks inadequate to attract investors away from the safety of short-term instruments. Historical comparisons with New Zealand, Canada, and Japan suggest a spread of 150 to 200 basis points may be needed to make long-dated US debt compelling-a level that implies a significant further climb in yields.

This growth backdrop, however, is a double-edged sword. The first half of 2026 is shaping up to deliver blockbuster U.S. growth, with nominal GDP expansion potentially heading toward a 7% annualized pace. This acceleration is driven by a potent mix of AI capital expenditure and a surge in tax refunds. Yet, this robust economic momentum is unfolding against a deteriorating geopolitical and policy backdrop. The U.S. dollar has little in its favor, with de-dollarization trends and strained alliances providing persistent headwinds. The dollar's retreat to multi-month lows is not a temporary reaction but a symptom of a broader reassessment of the US's strategic and monetary credibility. This creates a tension: strong growth supports asset prices, but the erosion of the US's global leadership and policy stability undermines the very premium that has long attracted capital.

Volatility is likely the most mispriced asset. The market's relative calm, with low implied volatility levels, is inconsistent with the high-stakes geopolitical and policy uncertainty now in the driver's seat. The state of the world doesn't change just because the calendar year does. The convergence of threats to the Fed's independence, trade tensions, and the acceleration of de-dollarization creates a persistent risk premium that is not reflected in current option prices. This disconnect sets the stage for volatility to spike when sentiment shifts, making it a critical risk factor for portfolios.

The bottom line is a year of divergence. Yields will climb as capital demands a higher premium for holding long-dated US debt. Growth will be strong but uneven, supported by fiscal and monetary policy but vulnerable to any escalation in geopolitical friction. And volatility, the market's most complacent asset, is primed for a rude awakening. Investors must prepare for a financial landscape where the old rules no longer apply.

Catalysts and Risks: What to Watch for the Thesis

The structural reassessment thesis is now in motion, but its trajectory hinges on a few critical catalysts and risks in the coming months. The market is watching for developments that will either confirm the deepening erosion of the US asset premium or provide a temporary reprieve.

The first and most direct test is the legal assault on the Federal Reserve. The Justice Department's criminal subpoena of Chair Jerome Powell is not a routine oversight matter. It is a high-stakes political gambit that directly challenges the central bank's independence. Any escalation in these proceedings-such as formal charges or a court ruling that undermines the Fed's autonomy-will be a major negative catalyst. It would validate the market's fear that monetary policy is becoming a political tool, further eroding the credibility of US assets and likely triggering another wave of capital flight. The current standoff, where the subpoena may actually make it harder for the administration to remove Powell, introduces a volatile uncertainty that markets cannot easily price.

Second, concrete developments on trade and geopolitical flashpoints will serve as immediate triggers for repricing. The White House's renewed tariff threats and its hardline stance on Greenland have already sparked a broad "Sell America" selloff. The market will be watching for any escalation in these disputes. A breakdown in talks with Denmark over Greenland, or the imposition of new tariffs on European allies, would confirm that the US is prioritizing unilateral objectives over alliance stability. This would accelerate the de-dollarization trends already in play and force a further retreat in dollar assets. Conversely, a de-escalation could provide a temporary boost to risk sentiment and the greenback, testing the durability of the reassessment.

Finally, the market's view on US growth and policy stability will be put to the test. The first half of 2026 is expected to deliver robust growth, with nominal GDP potentially expanding at a 7% annualized pace. This strength could support asset prices and the dollar in the near term. However, the thesis depends on this growth being sustainable and not undermined by policy missteps. The market is already pricing in a resilient labor market, as seen in the recent rise in Treasury yields on solid labor market data. The critical question is whether this economic momentum can outpace the growing political and geopolitical risks. If growth data remains strong while policy uncertainty intensifies, it could create a dangerous divergence where fundamentals support assets but sentiment drives them lower. The bottom line is that robust growth alone is not a sufficient defense; it must be perceived as stable and insulated from the current political turbulence to hold the line.

The bottom line is that the coming months will be defined by these specific catalysts. The legal battle over the Fed, the outcome of trade disputes, and the interplay between strong growth and policy risk will confirm or challenge the structural reassessment. Investors must monitor these fronts closely, as they will determine whether the capital flight is a temporary reaction or the start of a prolonged reallocation.