Still exceptional: Why US assets continue to anchor global markets

July 11, 2025

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Despite headlines warning of de-dollarisation and shifting capital flows, the fundamentals of US investment-grade credit remain strong. With new sources of structural demand emerging, rumours of the demise of US exceptionalism appear greatly exaggerated, argues Anthony DeMeo.

If you believe the headlines in 2025, the US is at risk of losing its dominant position in the global financial system. Warnings of de-dollarisation, waning global demand for Treasuries, and a broad-based reallocation into non-US assets have become the norm. In my view, such fears are based on emotion, and not supported by hard data.

After widening in early April due to Liberation Day-induced volatility, credit spreads have retraced significantly, even though macroeconomic and geopolitical uncertainty persist. While this limits the opportunity for excess spread return, broader financial market strength is providing a cushion. Our favoured measure of implied volatility, the VIX, has declined from 57 on April 8 to the mid-teens by early July,¹ while the S&P 500 is hovering around record highs.² To my mind, this is not an environment in which credit can underperform in a meaningful way.

US strength is not confined to equities. Cryptocurrencies are rallying,³ while US high yield and longer-dated investment grade have seen strong relative performance. The laggards have been shorter-dated IG corporate bonds, but even those have delivered positive returns.⁴

This relative strength is also evident when comparing year-to-date returns across US and European credit indices, albeit on an unhedged basis.

As Figure 1 shows, US investment-grade corporates have posted broadly positive returns across the curve, driven by falling government bond yields and resilient fundamentals. European markets, by contrast, have generally lagged on a total return basis.

The point is, the data doesn’t support the notion that the US is in decline. And while investors should always consider effective ways to diversify, the options remain limited. China is still largely closed to international capital.⁵  Europe lacks meaningful duration and depth in fixed income markets.

And while private credit continues to attract inflows, spreads in the upper middle market segment have compressed meaningfully.⁶ The trade-off, giving up liquidity for a shrinking premium over public markets, is becoming harder to justify. In a declining rate environment, floating-rate instruments are less likely to contribute as meaningfully to total returns, given their limited duration and lack of positive rate convexity.

New sources of structural demand could boost Treasuries – and IG as a result

A large part of the recent negativity towards US fixed income has been fuelled by speculation of a foreign investor exodus from the Treasury market,⁷ in large part due to  fiscal policy concerns and global trade tensions. And while there might be divestment at the margins, there is no evidence of a fire sale.

At the end of April, Japan, the largest international holder of Treasuries, still owned over US$1.1 trillion – marginally up on its holdings 12 months previously. Meanwhile, China - supposedly the likeliest ‘dumper’ of Treasuries as a response to trade tensions with the US - still owned US$757.2 billion, only marginally down year-on-year.⁸

It is also worth highlighting the underperformance of other sovereign bond markets this year, including Japan, UK, and Germany, where fiscal spending is also causing concern.⁹

Furthermore, two potentially powerful dynamics are emerging that could strengthen domestic demand for Treasury bonds and bills over the long term: the rise of US dollar-backed stablecoins and proposed changes to US bank capital rules.

The US Senate recently passed the Guiding and Establishing National Innovation for U.S. Stablecoin Act (AKA the GENIUS Act).¹⁰ While the bill still has to be ratified by Congress, it could mark a turning point for digital dollars. With regulated issuance now possible by banks, fintechs and even major retailers, the stablecoin market could become a significant buyer of Treasuries. Stablecoins must be backed by liquid, risk-free assets - namely short-dated Treasuries. If adoption grows as projected, the resulting demand could exceed US$1 trillion by 2030, comfortably surpassing China’s current holdings.¹¹

At the same time, US regulators are revisiting the Supplementary Leverage Ratio (SLR).¹² This currently penalises banks for holding or acting as market makers in low-risk assets like Treasuries by requiring equal capital to be held against all types of exposure. A recalibration of the enhanced SLR, especially for the largest banks, could unlock as much as US$5.9 trillion in additional balance sheet capacity.¹³

That would allow banks to intermediate more freely in Treasury markets, particularly in periods of stress when liquidity is most needed. A recent report by the Boston Fed revealed that when Treasuries and central bank reserves were temporally exempt from the SLR during COVID-19, banks significantly increased their Treasury holdings and trading activity.¹⁴

These developments build a domestic demand base for Treasuries that does not rely on foreign buyers. The scale of the US bond market underscores that strength: with over US$51 trillion in outstanding debt, the US accounts for more than 36% of the global fixed income universe - larger than Europe and China combined.¹⁵ So, despite fears of a pullback from overseas holders, the reality is that structural domestic demand is growing and could prove more stable.

The limits to de-dollarisation

A broader conversation is currently taking place around potential global de-dollarisation. The logic is that if countries like China or other emerging economies reduce US Treasury holdings, demand will falter and yields will spike. In my view, this ignores basic financial mechanics and how deeply entrenched the US dollar is in global markets.

If everyone tries to sell Treasuries at once, prices will fall and losses would ensue. But official institutions, who own around half of the Treasury securities held internationally,¹⁶ are not momentum traders. They manage reserves with an eye toward stability, not short-term profits. And once those Treasuries are sold, the dollars received still need to be recycled into other US assets unless there is a complete exit from the dollar system, something I would argue is both impractical and undesirable for most global institutions.

In practice, capital follows returns. And right now, the US continues to offer the most compelling mix of scale, liquidity, economic momentum, and institutional strength. Yes, hedging costs remain a headwind for some foreign investors, but this is a front-end issue.¹⁷ With the Fed expected to resume rate cuts shortly and the European Central Bank having limited scope for further easing, those hedging costs should compress, which logically should restore the appeal of US fixed income on a currency-adjusted basis.

Again, it is worth highlighting the importance of US dollar assets in the global financial system and lack of viable alternatives to support a material reallocation. According to the International Monetary Fund, 53.6% of the world’s US$12.4 trillion in FX reserves are held in US dollars, nearly triple the euro’s 18.4% share and far ahead of the Japanese yen’s 5.6%.¹⁸

In currency trading markets, the dollar remains the cornerstone: Bank for International Settlement data shows it is involved in 88% of the US$7.5 trillion traded daily in global FX.¹⁹  The dollar’s status as the one true global reserve currency is structural.

The weight of US corporate credit in global indices adds further proof. US names make up 57% of global investment-grade benchmarks and more than 61% of global high yield indices.²⁰ Even during April, when US trade tensions with the rest of the world reached a peak, foreign investors were net buyers of roughly US$45 billion in US corporate bonds, the highest level in six months. It is a similar story in the global stock market, where eight of the top ten and 62 of the top 100 companies in the world by market cap are listed in the US.²¹

This is not indicative of a flight from the world’s biggest financial market.

US IG: Mid-term report

From a positioning standpoint, we do not find spread valuations in US investment grade particularly compelling. Most of the recent rally has been driven by falling rates rather than spread compression. That said, all-in yields still look reasonable in our view, which logically should benefit when the Fed resumes rate cuts.

Recent market volatility, especially around tariffs and trade tensions, spooked many investors. But a more rationale interpretation of the US administration’s policy approach is that announcements come with initially aggressive rhetoric, followed by eventual recalibration. Few would argue that tariffs above 45% are viable in the long term. It seems more likely we will see compromise win out, lifting input costs without triggering a broad decoupling of supply chains.

If that is how things play out, investors currently holding large cash positions could re-enter the market, driving further upside. Even after the Israel-Iran conflict led to a softening in valuations, risk assets rebounded quickly, while oil dipped below US$70 faster than many expected,²² highlighting the resilience of global markets.

We continue to favour the 10-year and in segment of the curve. Issuance is increasingly skewed to the front end, which is where regulatory reform and stablecoin growth are likely to support demand. Meanwhile, the long end may remain anchored by structural forces - institutional demand, muted inflation, reduced supply, and steady rather than outsized growth.

From a sector perspective, we believe this is a time to be selective. Spreads of independent energy producers have tightened considerably and now offer less attractive risk/reward given the fall in oil prices. But infrastructure-related energy, particularly names tied to gas distribution and the power requirements of AI data centres, continues to look resilient.

The consumer has held up surprisingly well so far, but the impact of higher tariffs could change that. If input costs rise and companies are forced to trim expenses, we may see unemployment edge higher, which would weigh on cyclical consumer discretionary credits, where spreads already look stretched.

One area we find interesting is dated hybrid securities from large, high-quality issuers. In this segment, mid/high single digit yields are possible, not because of fundamental issuer weakness, but due to the structural characteristics of hybrids. For investors, these bonds can potentially offer income comparable to high-yield securities but with investment-grade fundamentals – a rare combination.

We remain cautious on segments such as business development companies and insurers with heavy exposure to private credit. These names can be difficult to exit quickly in times of stress and their valuations, in our view, look compressed.

As mentioned, divergence between the Fed and other major central banks is another important consideration. The ECB may stay on hold even as the Fed cuts, which has implications for hedging costs and cross-border positioning.

In our global portfolios, we have already begun to adjust currency exposure. Europe has outperformed US IG on a spread basis this year, while US returns have been more rate-driven. With US rate cuts ahead and hedging costs likely to ease, we have reduced a euro overweight and returned to a more neutral stance.

Remaining anchored to the US

It is easy to get swept up in headlines about the end of US dominance. But such narratives lack nuance. Yes, the world is changing, and capital will continue to explore new avenues. But the scale, stability, and rule-of-law that underpin US dollar assets are not easily replicated.

From FX reserves to bond markets, the US sits firmly at the centre of the global financial system. The US investment-grade bond market remains a core pillar of that ecosystem: liquid, stable, and fundamentally sound.

As we look ahead, it is worth remembering that exceptionalism is not a matter of superiority or even invincibility, but about enduring relevance. On that front, it is difficult to foresee an end to the US’s status.

References

1.CBOE, 'Chicago Board Options Exchange Volatility Index,' as of July 1, 2025
2.S&P Global, S&P 500, as of July 1, 2025
3.CoinMarketCap, Crypto Market Overview, as of July 3, 2025
4.ICE Index Platform, as of July 1, 2025
5.Cirium, "Shaking out the Airbus and Boeing 2024 delivery numbers," January 29, 2025
6.SPP, Middle Market Leverage Cash Flow Market At A Glance, as of December 2024.
7.Dow Jones, ‘Foreign investors are selling more Treasurys. That's bad news for U.S. borrowers,’ April 22, 2025
8.US Treasury, Major Foreign Holders of Treasury Securities, as of April 30, 2025
9.IMF, Fiscal Monitor, April 2025
10.CNBC, ‘Senate passes GENIUS stablecoin bill, giving crypto industry first major legislative win,’ June 17, 2025
11.Citi Institute, ‘‘Digital Dollars,’ April 2025
12.Federal Reserve, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, ‘Agencies request comment on proposal to modify certain regulatory capital standards,’ June 27, 2025
13.Morgan Stanley, ‘Our Views on SLR: The Best Is Yet to Come,’ June 27, 2025
14.Federal Reserve Bank of Boston, ‘Evidence That Relaxing Dealers’ Risk Constraints Can Make the Treasury Market More Liquid,’ March 4, 2025
15.Six Group, ‘Global fixed income market in numbers,’ as of December 31, 2024
16.US Congress, ‘Foreign holdings of Federal Debt,’ June 18, 2024
17.The Wall Street Journal, ‘Global Investors Have a New Reason to Pull Back From U.S. Debt,’ June 4, 2025
18.IMF, ‘Official FX reserves by currency,’ March 31, 2025
19.Bank or International Settlements, ‘Daily FX trading volumes,’ October 27, 2022. Most recently available data.
20.Bloomberg, ‘Bond binge shows America is still exceptional,’ June 28, 2025
21.Companiesmarketcap.com, ‘Largest companies by market capitalization,’ as of July 4, 2025
22.Oilprice.com, WTI Crude, as of July 1, 2025

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co are as of July 2025 and may change without notice.

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Index descriptions

C0A0: The ICE BofA  US Corporate Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market. Qualifying securities must have an investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of $250 million.

C2A0: The ICE BofA  3-5 Year US Corporate Index is a subset of the ICE BofA  US Corporate Index (C0A0) including all securities with a remaining term to final maturity greater than or equal to 3 years and less than 5 years.

C3A0: ICE BofA 5-7 Year US Corporate Index is a subset of ICE BofA US Corporate Index including all securities with a remaining term to final maturity greater than or equal to 5 years and less than 7 years.

C4A0: ICE BofA 7-10 Year US Corporate Index is a subset of ICE BofA US Corporate Index including all securities with a remaining term to final maturity greater than or equal to 7 years and less than 10 years.

J0A0: The ICE BofA US Cash Pay High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt, currently in a coupon paying period that is publicly issued in the US domestic market.  Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of $250 million.

ER00: The ICE BofA Euro Corporate Index tracks the performance of EUR denominated investment grade corporate debt publicly issued in the eurobond or Euro member domestic markets. Qualifying securities must have an investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity, a fixed coupon schedule and a minimum amount outstanding of EUR 250 million. 

ER02: ICE BofA  3-5 Year Euro Corporate Index is a subset of ICE BofA  Euro Corporate Index (ER00) including all securities with a remaining term to final maturity greater than or equal to 3 years and less than 5 years.

ER03: ICE BofA 5-7 Year Euro Corporate Index is a subset of ICE BofA Euro Corporate Index including all securities with a remaining term to final maturity greater than or equal to 5 years and less than 7 years.

ER04: ICE BofA 7-10 Year Euro Corporate Index is a subset of ICE BofA Euro Corporate Index including all securities with a remaining term to final maturity greater than or equal to 7 years and less than 10 years.

HE00: ICE BofA Euro High Yield Index tracks the performance of EUR denominated below investment grade corporate debt publicly issued in the euro domestic or eurobond markets. Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch) and at least 18 months to final maturity at the time of issuance. In addition, qualifying securities must have at least one year remaining term to maturity, a fixed coupon schedule and a minimum amount outstanding of EUR 250 million.

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