“The idea that various of the administration’s policies could undermine foreign demand for Treasuries has been gaining currency,” said Matthew Raskin, head of U.S. rates research at Deutsche Bank AG. It adds up to a world in which U.S. exceptionalism is no longer the dominant theme, which might have momentous long-term implications: Deutsche Bank warns of a “confidence crisis” in the U.S. dollar, while UBS Group AG sees a shot in the arm to the euro’s status as a global reserve currency.

To be sure, until such a shift happens, a healthy dose of skepticism is merited. Bunds looked similarly appealing in mid-2023, only for an aggressive selloff in Treasuries to send 10-year U.S. yields to 5 percent, eroding Europe’s yield advantage. If tariffs reignite inflation, that could again push U.S. yields higher. Yet the fact that such a change in flows is even under discussion shows that investors are bracing for Europe to play a bigger role in global markets as competition for capital heats up. That could lead to greater vulnerability in a U.S. Treasuries market that has found itself prone to buyers’ strikes in recent years amid concerns that supply could surge.

Monday’s decline in U.S. Treasury bond prices looks to some market watchers like a sign that the haven appeal is on the wane. “The UST selloff may be signaling a regime shift whereby U.S. Treasuries are no longer the global fixed-income safe haven in periods of risk-off,” Ben Wiltshire, G-10 rates trading desk strategist at Citigroup Inc., wrote in an emailed note. An early test arrived yesterday with the sale of $58 billion of three-year securities that attracted lackluster demand. Treasury yields ticked higher, notably in the long end, after the auction, with the market focused on sales of 10- and 30-year maturities due in the next two trading sessions.

For now, recent price moves present investors with a paradox—investors have flocked to Treasuries as a haven in the trade war turmoil, pushing up their prices and generating gains for existing holders. Yet because yields move in the opposite direction of price, the bonds become less attractive to new buyers who are now offered lesser returns.

Traditionally, the United States’ budget deficit has been financed in part by a wave of capital from across the world seeking exposure to Treasuries. All in, foreign ownership of U.S. Treasuries amounts to about a third of the market, while the foreign sector was the largest source of U.S. bond demand last year, according to a Barclays Plc analysis of fund flow data. That reflected net buying of $910 billion, about half of which was in Treasuries, they said.

Crucially, the vast majority of foreign Treasury holdings are in longer maturities, according to U.S. government data. That means as foreign demand dissipates, it can steepen the U.S. yield curve, said Ales Koutny, head of international rates at Vanguard, meaning long-term rates rise relative to short-term ones.

An early indication of how investors are navigating the global shifts in yields may come within days. The new fiscal year has just begun in Japan, a time when firms there typically review their allocation strategies. Japan is a key player on global bond markets because of the Bank of Japan’s decades-long policy of ultra-low rates, which sent investors out into the wider world in search of returns. “There may be a shift in funds by Japanese investors, since yields in Europe are more attractive,” said Hideo Shimomura, senior portfolio manager at Fivestar Asset Management Co. in Tokyo. “I think that’s the direction that Japanese investors in general will take.”

Germany kicked off the shift in early March, when it announced plans to unlock hundreds of billions of euros for defense and infrastructure. Bund yields soared as investors priced in a flood of bond issuance to pay for the spending.

The European Union’s large pool of excess savings means it is the largest foreign holder of U.S. public debt, while it also plays an outsize role in U.S. corporate funding. If European nations meaningfully ramp up investment, those savings may instead be kept at home.

Meanwhile, U.S. policy under Trump looks less stable, potentially eroding the appeal of Treasuries. Besides his trade war, Trump has up-ended domestic politics by undertaking an effort to dramatically shrink the federal government, and he’s alienated long-time allies by expressing his desire to acquire the Panama Canal, Greenland, and Canada. “The international marketplace is really scratching its head [about] what are the principles being espoused and how does that weigh on the certainty of expected returns in the future,” said Mark Howard, senior multistrategy analyst at BNP Paribas.

In any case, a growing body of investors and strategists are bracing for a rise in European rates. Howard expects “a gradual reversion to a more nationalistic investment process” and believes “higher yields in Europe and Japan will satisfy those nationalistic impulses.”

“If we’re entering a phase of further de-globalization over the long term, that can be a factor that impacts the supply-demand balance for longer-dated Treasuries,” said Chitrang Purani, portfolio manager at Capital Group Inc.

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