The shift in U.S. trade policy under the new administration has exposed deep structural issues in developed markets (DM). While initial fears of a collapse in asset flows were exaggerated, the long-term fundamentals are shifting. Post-global financial crisis, DM governments absorbed private sector debt, creating a cycle of easy money and rising public debt. The pandemic intensified this trend, pushing debt-to-GDP ratios beyond national income in many DM countries.

Now, with COVID-19 in the rearview mirror, policymakers continue to borrow and spend, driving debt-to-GDP ratios to unsustainable levels. The U.S. Congressional Budget Office estimates the ‘One Big Beautiful Bill’ will reduce tax revenues by $3.7 trillion over the next decade, while proposed spending cuts save only $1.3 trillion. Moody’s downgrade of U.S. debt in May has fueled the ‘sell America’ narrative.

Emerging market (EM) local currency yields have compressed relative to U.S. Treasuries, reflecting growing confidence in EM debt. This narrowing risk premium suggests investors are reassessing the relative safety and returns of EM assets.

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