The "Sell America" Trade Revival: Capitalizing on Fiscal Instability with Strategic Shifts

The downgrade of U.S. sovereign debt to Aa1 by Moody’s on May 16, 2025, marks a watershed moment for global capital markets. This decision, rooted in unsustainable fiscal dynamics and political dysfunction, has reignited the “Sell America” trade—a strategy of reallocating capital away from U.S. Treasuries and into higher-quality global bonds and inflation-linked assets. With Treasury yields spiking to multi-year highs, now is the time to act decisively.

Why U.S. Treasuries Are Now a Risky Bet

The U.S. downgrade reflects a structural erosion of fiscal credibility. Persistent deficits, driven by elevated interest rates and unfunded entitlements, have pushed federal debt to over 130% of GDP—a level incompatible with the AAA rating’s strict criteria. This has sent Treasury yields soaring: the 10-year yield has climbed to 4.46%, while the 30-year breached 4.90%.

But the true risk lies beyond nominal yields. The inverted yield curve—where 2-year rates exceed 10-year rates—signals markets are pricing in recession risks. This inversion, historically a harbinger of economic slowdowns, compounds the appeal of safer alternatives.

The Rise of German Bunds as the New Safe Haven

In contrast to U.S. fiscal instability, Germany’s 2.21% yield on 10-year Bunds offers a compelling risk-adjusted return. Germany’s debt-to-GDP ratio of 68%—among the lowest in the developed world—and its fiscal discipline position Bunds as the premier “risk-free” asset. The European Central Bank’s stable policy framework further insulates investors from volatility.

While the Bund yield is lower than U.S. Treasuries, the trade-off is clear: safety for yield. For every dollar shifted from U.S. debt to Bunds, investors gain exposure to a fiscally robust issuer while avoiding the tail risks of U.S. default or further downgrades.

Caution on JGBs: The “Risky Safe Asset”

Japanese Government Bonds (JGBs) present a more nuanced opportunity. Their 0.8% yield—a 15-year high—reflects market skepticism over Japan’s 252% debt-to-GDP ratio and the Bank of Japan’s impotence to normalize rates. While JGBs may offer short-term gains, their long-term viability hinges on structural reforms unlikely to materialize soon.

Investors should limit JGB exposure to tactical positions and avoid long durations. The risk of a “contagion” scenario—where yields spike to 2%—could trigger a liquidity crisis for holders of long-dated debt.

Inflation-Linked Securities: Armor Against Volatility

The final pillar of this strategy is inflation-linked bonds (ILBs), such as U.S. TIPS or German inflation-linked bunds. While their yields are not explicitly detailed, their role as a hedge against inflation and yield volatility is undeniable.

With central banks globally balancing growth risks and price pressures, ILBs offer dual benefits: principal adjustments for inflation and insulation from nominal yield spikes. For example, Germany’s 2024 30-year inflation-linked bond—offering a 0% coupon but inflation-indexed principal—provides a floor against deflation while capturing upside in a rising price environment.

The Call to Action: Shift Now

The writing is on the wall: U.S. fiscal credibility is broken, and Treasuries no longer deserve their “risk-free” status. Investors must pivot capital to:
1. German Bunds: For safety and stability.
2. Inflation-linked bonds: To hedge against uncertain price dynamics.
3. Selective high-grade corporates: With spreads at 99 bps, but only those insulated from trade wars.

Final Warning: The Clock is Ticking

The window to execute this shift is narrowing. As markets price in further U.S. fiscal deterioration and geopolitical risks, the cost of delay grows. The “Sell America” trade is no longer a contrarian bet—it’s a necessity for portfolios seeking resilience.

Act now. The era of U.S. debt as the world’s default safe asset is over. Capitalize on this inflection point before the next wave of volatility washes over markets.