Alicia Garcia-Herrero
The unpredictable nature of US President Donald Trump’s ‘Liberation Day’ reciprocal tariff agenda has resulted in a massive sale on the US Treasury market from 5–9 April 2025, when Trump abruptly lifted the reciprocal tariffs on every country but China.
The April 2025 Treasuries sell-off was partly due to fears of tariff-driven inflation, while over-leveraged, high-risk funds faced requests for margin replenishment. But more significant was investors’ recognition that Trump is serious about introducing hugely disruptive economic policies.
A second and milder sell-off followed in May 2025 as Trump passed legislation to cut taxes further, increasing the already-bloated fiscal deficit. Fears are mounting that the administration may pursue an even riskier economic program — the Mar-a-Lago Agreement.
Focusing on potential debt restructuring, the so-called Mar-a-Lago Agreement proposal, as suggested by chairman of Trump’s Council of Economic Advisors Stephen Miran, seeks to address the overevaluation of the US dollar. To Miran, this overvaluation is the biggest problem for the US economy, hurting manufacturing and leading to a huge trade deficit.
The Mar-a-Lago Agreement proposal involves no less than a restructuring of US sovereign debt by swapping short-term Treasury bonds — particularly those held by foreign investors — for longer-term, if not perpetual non-negotiable zero-coupon obligations with a much lower implicit yield. This swap would reduce debt financing costs for the US government and weaken the dollar.
While this proposal seems simple, its consequences would be devastating, including a potential technical default on what is today the safest asset of the world denominated in the reserve currency — US Treasury bonds.
This will particularly affect Asian investors, as major holders of US Treasuries. Central banks like the People’s Bank of China and the Bank of Japan would be affected, along with many private investors, especially Japanese and Taiwanese financial institutions.
Since April 2025, Asian investors have been more active in selling US Treasuries compared to other investors. Japanese investors sold around US$20 billion in Treasuries in the week following ‘Liberation Day’, with China potentially selling a similar amount. The silver lining of the Mar-a-Lago Agreement is that its potential negative consequences are so large that the likelihood of its implementation is low. But Trump’s staggering reciprocal tariff agenda demonstrates that anything is possible.
The key difference between the Mar-a-Lago proposal and Trump’s tariff regime is that the latter can be brought down again, as happened on 9 April 2025 and after the US–China truce was signed on 11 May. But even if the Trump administration were to backtrack from the Mar-a-Lago Agreement, the harm would be much larger unless capital controls were to be imposed for investors holding US Treasuries.
A devastating financial swap is not the only option that Miran offers to weaken the dollar. An alternative proposal is for the US Treasury to seek support from the Federal Reserve in reducing financing costs through a new wave of quantitative easing, by which the Fed steps up its purchases of US Treasuries.
Beyond quantitative easing, history offers examples of collaboration between the Treasury and the Fed to place downward pressure on interest rates. In March 1942, shortly after the United States entered World War II, the Fed agreed to fix interest rates on government securities at low levels to allow the Treasury to finance wartime spending. While those were different times, with controls on cross-border capital flows and pegged exchange rates, history still shows that what seems to be unthinkable has already happened.
Persistently high and volatile US Treasury yields since early April 2025 might lead to the conclusion that forced restructuring — or at least the involvement of the Fed — is unavoidable.
But Trump’s behaviour indicates that nothing is certain. Market sell-offs and panic in the stock and US Treasury market, as happened after ‘Liberation Day’, have been followed by policy reversals. The market seems to be limiting Trump’s agenda, including the sell-off of US Treasuries by Asian investors. This makes implementing Miran’s Mar-a-Lago Agreement unlikely and politically unfeasible.
While the worst of Miran’s agenda may have been averted thanks to a strong market reaction, US Treasuries can clearly no longer be considered the world’s safest assets, even despite Washington’s exorbitant privilege as the issuer of the world’s reserve currency.
The virtuous cycle by which the United States has long managed to attract foreign capital to finance huge trade and fiscal deficits is becoming increasingly uncertain.
Alicia Garcia-Herrero is Senior Research Fellow at the Brussels-based think tank Bruegel and Adjunct Professor at the Hong Kong University of Science and Technology.
Source: East Asia Forum
