US trade and fiscal developments in the second quarter of 2025 have led to a heightened debate regarding the status of US assets in global portfolios. We acknowledge that the market is justified in reassessing their allocations and there is merit in attaching a higher risk premium to affected assets. However, we believe that talk of comprehensive liquidation of and diversification away from US assets is marginal at best.

Based on our custody flow and holdings data, which cover approximately a fifth of the world’s investible assets, we believe moves away from the US are minimal. In some cases, cross-border investors have even uncovered value and are adding to allocations. Misgivings are unavoidable, but the US remains the world’s pre-eminent investment destination due to size, breadth and liquidity.

Dollar is overheld against other key currencies

Looking at asset performance since ‘Liberation Day’ on 2 April, the dollar is the only US asset that has failed to recover losses on key benchmark pairs. Given the liquidity available in the foreign exchange market, the dollar was always going to be the easiest way to reflect any form of US policy risk. However, we note that the reason the dollar moved so aggressively was not just due to rich valuations but excessive under-positioning of other currencies in the first place.

Our data show that hedges in the euro – reflected as underheld positions by our cross-border investors – reached close to 2.5 times the rolling one-year average towards the end of 2024. This was clearly unsustainable and unjustified, even with a more downbeat outlook on the euro at the time. The fundamental shift towards domestic investment, spearheaded by Germany’s reform of its constitutional debt break, led to a sharp unwinding of such positions.

These political decisions were in part driven and amplified by US foreign policy but were much-needed in Europe. Our holdings data show that, except for the Japanese yen, Korean won and the Norwegian krone, the dollar remains comfortably overheld against key currencies in developed and emerging markets, anchored by a cautious Federal Reserve.

Although US equities have erased their post-Liberation Day losses, our data indicate that cross-border holdings remain well off their peak from late Q3 last year. However, there are some key caveats.

First, on an absolute basis, current holdings by non-US investors remain marginally above their rolling 12-month average. Second, there is no gap in place relative to domestic investors. In contrast, cross-border investors holdings were well above total investor holdings between June 2023 and September 2024 (Figure 1). The current convergence suggests that if there is any change in status, cross-border investors were simply adjusting the notion of ‘US exceptionalism’, which has gone from ‘very exceptional to ‘somewhat exceptional’. True diversification or loss of status would entail material under-weighting of cross-border portfolios in US equities, which is currently not the case.

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Figure 1. Cross-border investor holdings were well above total investor holdings
Scored holdings, June 2023 to June 2025

♦ Scored holdings: cross border    ♦ Scored holdings: all

Source: BNY/ WM/Refinitiv

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The biggest source of concern at present is in the US Treasury market. Liberation Day initially generated sales due to risk aversion and liquidity preference. This swiftly gave way to fears over forced selling by US trade partners who are the biggest owners of Treasuries. After all, irrespective of the motive, any form of trade rebalancing would entail lower surpluses with which to purchase US paper among such investors. Fiscal sustainability concerns amid the US’ current budgetary process have added to the upward pressure on yields.

Our data indicate that cross-border interest in US sovereign debt was indeed weak in the immediate aftermath of Liberation Day, especially in the more liquid parts of the curve such as the one- to three-year space. However, even during that period cross-border clients were net buyers of very long-dated debt, and flow averages in 10-year-plus maturities have been relatively robust throughout Q2 2025, based on our data. Market conditions may have precluded aggressive sales of such assets as the need to maintain financial stability normally concentrates activity at the front-end of the Treasury curve by reserve managers.

However, we believe that value also opened up for US duration: long-dated yields approaching 5% while the dollar was suddenly around 10% lower (DXY basis) from its January peak were seen as more than enough to compensate for any perceived US policy risk (Figure 2). As yield pressures in much of Asia – the biggest source of cross-border Treasury purchases – remain to the downside as growth risks arise from export weakness, adding to high-yielding US Treasuries is a compelling asset allocation case, especially with dollar and equity allocations having adjusted lower.

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Figure 2. Long-duration yields able to compensate for perceived US policy risk
Scored flow, January to June 2025

♦ Scored flow: cross border, 1-3 year maturity    ♦ Scored flow: cross border, >10 year maturity

Source: BNY/ WM/Refinitiv

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To be clear, we agree that there are challenges to long-term asset allocation in the US for cross-border investors. US policy risk is one factor, but the current structure of the market means rotation can only go so far: US assets will remain dominant out of necessity as much as choice.

The rest of the world will need to show that it can outgrow the US, not just in corporate profitability and household income, but also the scope, breadth and accessibility of investible assets to global investors. Most of these necessary conditions remain unsatisfied, leaving allocations in the US by default.

To paraphrase European Central Bank President Christine Lagarde’s seminal speech on currencies in May where she talked of an opening for a ‘global euro moment’: any currency or asset will not gain influence by default – it will have to earn it.