By
Derek Hamilton
April 29, 2025
Following the Trump administration’s tariff rollout, equity markets weakened significantly due to investor concerns around a recession. US Treasury yields rose, and the dollar fell over the same time period, which is atypical because recession fears usually result in flows into safe-haven assets, namely US Treasurys and the US dollar.
Media reports pinned the move in US Treasurys on investors unwinding specific trades called basis trades. While we don’t have the space here to explain basis trades in full detail, these trades allow investors to take advantage of small amounts of arbitrage in the US Treasury market, which are then leveraged to amplify gains. We believe this trade contributed to the rise in Treasury yields; however, we wonder if there are additional factors at play.
Our biggest concern lies with foreign investors. Today’s chart looks at the US net international investment position, which measures the difference between US investments made abroad and those made by foreign investors in the US. As you can see, the amount of investment flowing into the US has swamped outgoing US investment. This has been a positive in it has kept interest rates relatively low while boosting US equity markets. However, this also means foreign investors could be overweight US assets.
We are worried global investors are becoming concerned about the direction of US policies, a situation reflected in the weakness of the US dollar. If the rise in Treasury yields were solely due to the basis trade, we would have expected the dollar to strengthen. Investors should be aware not only of the underlying macroeconomic drivers but also sudden changes in capital flows that could influence movements in financial markets.
US Net international investment position
Sources: Macquarie, Macrobond, US Bureau of Economic Analysis.
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