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Martin Pelletier: The move contributes to factors driving up financing pressures, affecting corporate debt and equity valuations
One of my favourite follows on X is Luke Gromen of Forest for the Trees. The macroeconomic researcher recently shared a chart that deserves far more attention than it is getting, comparing the U.S. 10-year Treasury term premium against It reveals a massive divergence between the two, prompting Gromen to pose a simple but powerful question:"If there is no de-dollarization going on and China's economy is in deflation, both consensus views, why are U.S. 10-year term premiums rising?
"For more than two decades, China served as the world's deflationary anchor. As its manufacturing capacity expanded, inexpensive Chinese goods flooded Western markets, suppressing consumer prices even as governments and central banks increased spending and liquidity. At the same time, China recycled its growing trade surpluses back into U.S. government bonds. The arrangement created a powerful feedback loop: Americans consumed, China produced, U.S. dollars accumulated in Beijing, and those dollars flowed back into Treasuries.
The result was lower borrowing costs for Washington, strong demand for U.S. government debt, and reinforcement of the U.S. dollar's position as the world's reserve currency. That system is now under increasing strain. The post-COVID economic restart, chronic trillion-dollar fiscal deficits and a major shift in U.S. trade and geopolitical policy have accelerated changes that were already underway. China's domestic economy remains mired in deflation, weighed down by a struggling property sector, weak consumer confidence and disappointing domestic demand.
Historically, those conditions would have exported powerful disinflationary forces to the rest of the world. Instead, inflationary pressures remain elevated as supply chains are reshored, tariffs raise costs, geopolitical tensions increase uncertainty and disruptions to global energy markets add further pressure. The more important story, however, is not inflation itself but the changing direction of global capital flows.markets.
Chinese Treasury holdings have fallen from a peak of more than US$1.3 trillion in 2013 to roughly US$618 billion today, a reduction of nearly US$700 billion. Over a similar period, official ChineseGold does not finance U.S. government deficits, support Treasury prices or help suppress long-term borrowing costs. It sits outside the dollar-based financial system entirely. At the same time, a growing share of global trade is being settled directly in local currencies through bilateral agreements that bypass the U.S. dollar.
None of these developments individually threaten the U.S. dollar's reserve status, but collectively they point to a gradual diversification away from the system that dominated global trade and finance for decades. Financial systems rarely change overnight but they do evolve incrementally until the cumulative effects become impossible to ignore. Markets may be beginning to recognize those effects today. A world built around efficiency is steadily giving way to one built around resilience, security and strategic interests.
Production is moving away from the lowest-cost jurisdictions toward politically aligned trading partners. Capital that once automatically recycled into U.S. government debt is increasingly being directed toward gold, strategic resources and regional financial arrangements. As an investor, it is important to understand the implications. Less efficient supply chains, larger fiscal deficits and reduced foreign demand for U.S. Treasuries all point toward a more inflationary backdrop and structurally higher long-term interest rates.
The problem is that higher U.S. yields drive up financing pressures globally, directly affecting corporate debt, equity valuations and consumer mortgage rates in highly interconnected economies such as Canada's. Furthermore, rising term premiums indicate that investors are already demanding greater compensation to absorb these structural risks, creating an escalating refinancing hurdle for a U.S. Treasury that must continually roll over a rapidly expanding national debt load.
The timing couldn't be worse as, according to aby The Brookings Institution, financing the artificial intelligence buildout will total US$10.3 trillion from 2025-2032, or an average of 3.63 per cent of U.S. gross domestic product each year. The chart that Gromen highlighted may ultimately be showing something much larger than a divergence between bond yields. It may be revealing the early stages of a transition away from the hyper-globalized system that defined the past 30 years.
Chinese deflation is no longer offsetting Western inflation the way it once did because the mechanisms that transmitted those forces are weakening. If the world's largest exporter is no longer recycling its surpluses into U.S. debt at previous levels, rising term premiums may simply be the market's way of pricing in a new reality: a less globalized, less dollar-centric and ultimately more inflationary world.and a senior portfolio manager at TriVest Wealth, a team that is part of Wellington-Altus Private Counsel Inc. TriVest provides discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus.
China Luke Gromen China’S Economy Fiscal Deficits Trade Surpluses
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