Selling US debt, Europe’s difficult weapon against Trump

On Tuesday at the Davos forum, U.S. Treasury Secretary Scott Bessent ridiculed the idea that Europe might retaliate against Donald Trump’s expansionist ambitions in Greenland by selling U.S. Sovereign bonds. He said the notion “defies any logic,” although the market seems to have taken note of the possibility, triggering a selling wave that exposes the vulnerabilities of the world’s largest economy: its high debt and the imbalance of its public accounts.

Tension has already appeared in U.S. Sovereign debt, as was the case last April when Trump announced a barrage of tariffs. Washington is upending the global geopolitical order and using tariffs to advance its expansionist aims in Greenland: it threatened a 10% levy starting in February — potentially rising to 25% later — on European countries that deployed troops to the island. These threats were later withdrawn after Trump announced that a “framework” for a deal on Greenland had been reached.

European investors hold substantial U.S. Debt: the United Kingdom $800 billion; Belgium $399 billion; Luxembourg $328 billion; Switzerland $243 billion; and Norway $218 billion. A halt in European purchases of U.S. Sovereign bonds would be unthinkable and could trigger a global financial collapse. U.S. Treasury bonds are the global benchmark in capital markets, where governments and corporations issue debt in dollars, and the greenback is the currency in which over half of world trade is conducted, including gold and oil payments. Yet Trump’s policies are accelerating investors’ disinterest in the dollar and U.S. Sovereign bonds, following straightforward financial logic rather than any political retaliation.

On Tuesday, the yield on the 10-year U.S. Treasury approached 4.3%, the highest since August, while the 30-year yield neared 5%, a level that could trigger stock market corrections and alarms among bond watchers. “At 5%, U.S. Tech valuations are unsustainable,” warns Roberto Scholtes, strategist at Singular Bank. The session was also influenced by spillover from pressure on Japanese bonds — the 40-year yield hit 4% for the first time — although tensions were more evident in U.S. Public debt than in European debt.

Pimco, the world’s largest fixed-income manager, acknowledged last week that it plans to diversify its investments and reduce its exposure to the United States in response to Donald Trump’s “unpredictable” policies. Meanwhile, the Danish pension fund managing teachers’ and academics’ pensions revealed yesterday that it will sell its portfolio of U.S. Sovereign bonds — around $100 million of the $25 billion it manages — by the end of this month. “The U.S. Is basically not a good credit and long-term the US government finances are not sustainable,” Anders Schelde, chief investment officer of AkademikerPension, told Bloomberg.

Whether motivated by retaliation or financial prudence, analysts agree that a rapid sell-off of U.S. Sovereign debt by the EU is unlikely, even though U.S. Assets are already losing some appeal in the market. “Europe holds $3.6 trillion in U.S. Treasury bonds, representing just under 40% of all U.S. Public debt in foreign hands. The U.K., Belgium, Luxembourg, and France hold the largest shares. This creates theoretical pressure points for Washington, particularly given the political sensitivity of long-term Treasury yields and the context of the upcoming midterm elections,” notes Felix Feather, economist at the Scottish asset manager Aberdeen. However, he also warns that selling these bonds as a form of revenge “would be logistically difficult and would carry undesirable side effects for the European economy.”

An aggressive sale of U.S. Bonds would first and foremost cause losses for European pension funds, a politically difficult cost to justify. China, the U.S.’s archrival for global economic and technological leadership, is the second-largest foreign holder of U.S. Sovereign debt, behind only Japan, with holdings exceeding $680 billion. Yet it has not activated any retaliatory bond sales in response to tariffs: a massive divestment would only devalue its own holdings, weaken the dollar, and strengthen the yuan, harming Chinese exports.

Moreover, most European exposure to U.S. Assets rests with private investors, not governments. “EU policymakers would therefore have to coordinate not only with member-state governments but also pressure the private sector to sell their assets if Europe wanted to offload U.S. Treasuries. The prospects of overcoming these obstacles are limited,” adds Feather. In his view, “we are still far from any massive European divestment in U.S. Treasuries.”

Derek Halpenny, head of global markets research at Japan’s MUFG bank, agrees: “Intentional sales as retaliation seem very unlikely. Governments can hardly compel private-sector investors to sell.” He also notes that many of the main holders of U.S. Debt, such as the U.K., act as intermediaries for ultimate owners in other countries, so the actual holdings are much smaller. “Ireland holds $238 billion, but many U.S. Tech companies are the ultimate owners,” he says.

The United States continues to attract international investment thanks to its tech sector and the largest, deepest capital market in the world, unmatched anywhere else. U.S. Net international investment, after decades of fiscal and trade deficits, rose by $3.2 trillion in the third quarter of last year. Chris Turner, an ING expert, explains that roughly half of that growth resulted from valuation effects on U.S. Assets. “These valuation effects are why European buyers remain active in U.S. Asset markets. Until expected returns on those assets change significantly, it is unlikely we will see a substantial outflow of European capital from the United States,” he says.

Still, diversification of major managers’ bond portfolios is underway, albeit gradually. “Even though fiscal policy is on track to support growth this year, it’s unclear whether bond investors will continue financing the high deficits and growing U.S. Public debt at still-low yields. Worsening fiscal conditions, the unpredictability of Trump’s policies, and America First strategies could divert some foreign demand for U.S. Bonds,” Berenberg notes. Meanwhile, as U.S. Treasury yields rose on Tuesday, Spain completed a 10-year syndicated bond issuance with unprecedented demand of €144.9 billion ($169.3 billion).

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