Foreign Capital Chose Corporate Balance Sheets Over the Government's
Foreign investors bought more US equities than US government bonds in the year to June, the first time this century outside brief episodes during the pandemic and after the financial crisis. Deutsche Bank's analysis of Treasury data puts international flows into stocks at 2.8% of US GDP against 2% for Treasuries. The 10-year yield reached its highest level since 2007 on Tuesday, and the 30-year has climbed from 4.83% to 5.32% this year.
Per the Financial Times, Emily Herbert and Ian Smith report the reason in one line from Deutsche Bank's George Saravelos, who called it a huge shift in US asset markets and described the American private balance sheet booming while the public sector balance sheet keeps worsening. He went further, writing that US assets are no longer the safe but the risky asset of choice, and suggesting the dollar's value may now track equity flows rather than Treasury flows. If that holds, the currency would strengthen when risk appetite rises rather than during flights to safety, inverting how it has traded for decades.
The doubt is being stated plainly by people who buy this paper for a living. BlackRock's James Turner said government bonds are not as risk-free as they used to be, and that a corporate balance sheet running these deficits would not be described that way. Man Group's Matt Rowe said he has never heard so much concern and debate about what risk free actually means. Norway's $2.3 trillion oil fund has proposed cutting US Treasury holdings by roughly $80 billion in favour of agency mortgage-backed securities. State Street's Marija Veitmane reports the same rotation among institutional clients, and her reasoning is straightforward. Set corporate fundamentals against government fundamentals and the companies look solid.
They do. The S&P 500 is up about 12% this year, on track for a fourth consecutive year of double-digit gains, with second quarter earnings growth of 52% year over year, or 34% excluding one-off gains Amazon and Alphabet booked on stakes in other AI companies. AI capital investment is pushing profit margins to highs unmatched in FactSet data going back to 2009. Against that, gross federal debt passed $40 trillion last month, the deficit continues, and Trump has pledged a $5,000 payment to every adult citizen if Republicans hold Congress, at a cost above $1 trillion.
What the rotation does not do is leave the problem. Both instruments are claims denominated in the same currency, issued inside the same fiscal system, and priced off the same discount rate. Rowe made the point himself, noting that investors worried about Treasuries ran into the same rising issuance elsewhere, so equities ended up competing for those funds by default. Robeco's Michiel Plakman put the dependency bluntly, saying trouble in the bond market is usually what troubles stocks. Higher yields raise corporate borrowing costs and make fixed income more attractive, which is the mechanism by which the equity leg of this trade stops working.
Bessent's buyback programme was supposed to interrupt that sequence and disappointed on arrival, accepting $5.2 billion against a $32 trillion market while yields kept climbing.
What to watch is whether the two legs separate or converge. The bull case for this rotation is that private balance sheets can outrun public ones indefinitely. The bear case is that every US asset is ultimately a claim on the same taxing authority and the same unit of account, and that the question Rowe keeps hearing, what risk free actually means, does not have an answer inside the dollar system.