International Finance Bank LTD

U.S. Yields Surge but the Dollar Stalls


Financial Intelligence Report: 

How Coordinated Foreign Treasury Sales Undermined Trump’s Tariff Strategy


By M. Herzog, 14.April 2025
 

Introduction: Carney’s Alleged Plan – Origins and Credibility 


In late 2024, reports surfaced of a clandestine financial strategy purportedly devised by Mark Carney – former central banker turned Canadian political leader – to counter President Donald Trump’s and Stephen Miran - former Hudson Bay Senior Strategist and actual  Council of Economic Advisers of the The White House - aggressive tariff campaign initially based on “A User’s Guide to Restructuring the Global Trading System”. According to these accounts, Carney quietly orchestrated a “coordinated Treasury bond slow bleed” among U.S. allies (notably Canada, the EU, and Japan) as leverage against Trump’s escalating trade war. The plan, discussed in closed-door meetings with European and Japanese officials, was simple in concept: if U.S. tariffs went too far, allied nations would gradually unload U.S. Treasury holdings in unison, signalling that America’s financing lifeline could be pulled away. Carney reportedly warned Trump in a private call that Canada “won’t be alone” in dumping U.S. bonds and that others would follow suit – a move that could make the U.S. dollar “drop like a rock”. This implicit threat of a coordinated foreign divestment was intended as a financial deterrent: “Hurt us and we will hurt you,” conveying that America’s trading partners, who collectively hold over $8.5 trillion in U.S. debt, could exact revenge beyond conventional tariffs. 

 
While no government publicly confirms such financial war plans, the credibility of Carney’s strategy is bolstered by observable trends. Canada’s U.S. Treasury holdings indeed surged by roughly $100 billion in 2023 (reaching about $350–380 billion by early 2025), positioning Ottawa with an unusually large stake. This accumulation aligns with Carney’s alleged preparation of a “loaded gun” – a stockpile of U.S. bonds that could be quietly sold off if provoked. Likewise, key U.S. allies like Japan and European nations together hold well over $1.5 trillion in Treasuries, meaning a broad alliance could significantly sway the $24 trillion Treasury market. The origin of the Carney plan appears to be traced to strategic discussions in mid-2024 as Trump threatened sweeping new tariffs (e.g. mooting 125% duties on Chinese goods and 25% on Canadian autos in a dramatic escalation). Facing this, Carney – widely respected as a technocrat – allegedly coordinated an unprecedented financial counter-offensive: a persistent, synchronized sell-off of U.S. bonds by allied central banks and sovereign investors. 
 
It must be emphasized that this narrative stems from high-level commentary and insider accounts (e.g. a widely-circulated analysis by Canadian commentator Dean Blundell and corroborating social media posts ). No formal statements by Carney or G7 officials have confirmed an explicit “bond war” pact, and elements of the story (such as Carney serving as Canada’s Prime Minister in 2025) reflect political conjecture. Nonetheless, the behaviour of global markets lends plausibility: Foreign Treasury holdings spiked and then started ebbing exactly as trade tensions peaked, suggesting coordinated action. By April 2025, the effects attributed to this plan – rising U.S. bond yields, sustained inflation, and hints of stagflation – were evident, indicating that whether by deliberate design or prudent self-interest, foreign creditors have indeed used their financial clout to undermine Trump’s tariff gambit. 
 
 

Sovereign Bond Divestment: Macroeconomic Impact 

Selling U.S. Treasuries is a potent economic weapon. U.S. Treasury bonds are the linchpin of global finance, benefiting from constant foreign demand that keeps American borrowing costs lower than they would otherwise be. A coordinated foreign divestment – especially by major holders like Japan (>$1 trillion), Europe (~$1.5 trillion combined), and Canada (>$350 billion) – fundamentally alters the supply-demand balance in the Treasury market. The mechanics are straightforward: dumping Treasuries (even gradually) floods the market with excess supply, driving down bond prices and pushing yields sharply upward. Yields, which move inversely to bond prices, must rise to entice remaining buyers to absorb the glut of bonds. 
 
Higher U.S. yields are exactly what began to materialize in late 2024 and early 2025. Notably, even as the Federal Reserve quietly pivoted to cutting interest rates (by a cumulative 100 basis points after September 2024), the benchmark 10-year Treasury yield climbed roughly 100 basis points in the same period, an anomalous divergence dubbed a “reverse conundrum”. Researchers have linked this jump in yields to a steep reduction in foreign official demand for U.S. bonds. Foreign central banks collectively slashed their dollar reserve assets by $113 billion from mid-September 2024 through early 2025 – a time when nominal and real 10-year yields surged 70–100 bps. The timing and magnitude of these moves strongly suggest that waning foreign purchases (and net sales) of Treasuries exerted significant upward pressure on U.S. long-term interest rates. Figure 1 illustrates this pattern: as foreign official dollar reserves (held at the Fed) began declining in Q4 2024, U.S. 10-year real yields and term premia spiked in tandem, indicating investors demanding greater return to hold the swelling stock of Treasuries. 

For the United States, the macroeconomic fallout of spiking yields is decidedly negative. Government borrowing costs rise immediately as new debt is issued at higher rates, and existing short-term debt is rolled over. The U.S. Treasury – which must refinance over $10 trillion of maturing debt in 2025 alone – suddenly faces much steeper interest expense projections. (In fact, analysts estimate 2025 will require $12 trillion in gross issuance when adding new deficits, far outstripping the capacity of domestic investors unless rates keep climbing .) Higher Treasury yields also translate to tighter financial conditions economy-wide: corporate and household borrowing rates (from mortgages to business loans) tend to track the Treasury curve, so a surge in yields raises the cost of capital for virtually all sectors. As one market observer noted amid the early 2025 sell-off, “This is a fire sale of Treasuries…I haven’t seen moves or volatility of this size since the chaos of the 2020 pandemic”. The reference to 2020 underscores the gravity – the bond market dislocations in 2025 were on par with crisis-like conditions, except this time induced by policy conflict rather than a global health emergency. 

 

The divestment strategy’s implications for the dollar and inflation are complex. In theory, if foreign holders en masse sell U.S. bonds and convert the proceeds out of dollars, the U.S. dollar should depreciate on global currency markets (more sellers of USD assets means more supply of USD, weakening its value). A weaker dollar would normally help U.S. exporters but also make imports more expensive, adding to inflation. Indeed, U.S. officials have long recognized that a sharp dollar decline could add meaningful inflation: A Federal Reserve study finds that a 20% USD depreciation would raise U.S. consumer inflation by on the order of 0.6–1.0 percentage points. In current circumstances, any such depreciation-driven price spike would come on top of already above-target inflation – a troublesome prospect. There is evidence that foreign selling has begun to weaken the dollar’s global share, if not its exchange rate: as of early 2025, foreign central banks were reallocating away from USD assets (neither reinvesting in Treasuries nor the Fed’s USD repo facilities), possibly shifting into gold and other currencies. However, interestingly, the initial market reaction saw the U.S. dollar strengthen alongside rising yields, suggesting a “safe-haven” flow or anticipation of higher U.S. rates attracting private capital. This dynamic indicates that in the short run, foreign official selling raised yields but did not (yet) crash the dollar – perhaps because other investors filled part of the gap. U.S. dealer banks, for example, absorbed about $70 billion of Treasuries unloaded by foreign officials after November 2024. Such stopgaps are finite, though, and continued foreign divestment threatens to eventually weaken the dollar once domestic balance sheets saturate. 

 

Persistent inflationary pressure is a likely byproduct of this sovereign bond sell-off. Higher import costs from a softer dollar, plus rising interest costs for businesses (which can feed through to consumer prices), create an inflationary tilt just as the supply-side shocks from tariffs bite. Moreover, the Federal Reserve’s policy response is constrained: normally the Fed might cut rates to support growth when fiscal headwinds rise, but if inflation is still running hot or the dollar is sliding, the Fed could be forced in the opposite direction – to hike rates or hold them high to quell price instability. In effect, foreign divestment of Treasuries can diminish the efficacy of U.S. monetary policy, or even force a tightening bias when the economy is weakening. This toxic mix – rising borrowing costs, sustained inflation, and limited central bank flexibility – is the recipe for stagflation, as discussed next. 

 

 

Neutralising Trump’s Tariff Strategy: Financial Countermeasures 

Trump’s tariff strategy was predicated on leveraging U.S. import demand to extract trade concessions, assuming that U.S. consumers and industries could withstand higher import costs better than exporting nations could withstand lost sales. In his first term (2018–2019 trade war), this bet seemed to pay off in the short run: despite tariffs on hundreds of billions in goods, U.S. inflation remained tame and growth held up. A key reason was the exchange rate adjustment – China allowed the renminbi to depreciate ~15%, offsetting most of the U.S. tariff impact on import prices. One Federal Reserve study found Trump’s initial tariffs added at most 0.3% to core PCE inflation (a minor and transitory bump), and indeed U.S. core inflation never exceeded 2% in 2018 and fell in 2019. In essence, foreign governments and exporters “neutralised” the tariffs by absorbing costs or weakening currencies, preventing a worst-case inflation spike in the U.S. while diminishing the tariffs’ pressure on their economies. 

 

The new round of tariffs in 2025, however, is of a far greater magnitude and has been met with far more potent pushback. Trump’s mooted tariffs on China reached an astonishing 104% on certain goods, with broad tariffs threatened on allies as well. Facing this existential threat to their export markets, U.S. allies opted for a financial counteroffensive: using their position as America’s creditors to undermine the tariff strategy’s effectiveness. By coordinated Treasury sales and associated currency manoeuvres, countries like Canada, Japan, and European states effectively blunted the impact of tariffs in two ways: 

 

  • Offsetting the trade advantage: If the U.S. dollar weakens as a result of foreign bond sales (or even the credible threat of them), foreign exporters become more competitive in price even with tariffs in place. For example, if Canada’s actions lead the U.S. dollar to depreciate against the Canadian dollar or euro by, say, 10%, a 25% U.S. tariff on Canadian autos might be partly negated by the exchange rate shift. A simplified illustration: a 10% tariff paired with a 10% foreign currency depreciation leaves the U.S. import price almost unchanged. This was essentially what happened in 2019 with Chinese goods, and in 2025 allies signalled they could engineer a similar offset via global markets rather than direct forex intervention. Carney’s message to Trump explicitly emphasized this point – that dumping Treasuries would directly hit the dollar’s value and erode America’s trading leverage. In short, the bond sell-off strategy threatened to neutralise the tariffs by making U.S. import prices in dollar terms barely rise, or even fall, after accounting for currency moves.
  • Imposing domestic economic pain on the U.S.: The coordinated Treasury divestment made itself felt in surging interest rates and financial volatility in the U.S., as detailed above. This created collateral damage within the U.S. economy – from a jump in mortgage rates for homeowners to higher interest costs on U.S. government debt itself. By early April 2025, as Trump’s new tariffs took effect, the U.S. 30-year bond yield had spiked above 5% (the highest in over two decades), and equity markets were trembling. Investors openly began to lose confidence in U.S. financial leadership as the trade war metastasized into a bond sell-off; one headline noted a “dramatic sell-off of US government bonds” reflecting a “loss of financial confidence in the US as Trump escalates [the] trade standoff”. The squeeze was not just in the U.S.: UK and European bond yields climbed in sympathy (UK 30-year gilt yields hit 5.65%, a 27-year high), putting allied governments themselves under pressure. This demonstrated the resolve of Canada, Europe, and Japan – they were willing to endure some financial stress on their side to send a clear signal to Washington. From Trump’s perspective, however, the message was unmistakable: continuing the tariff aggression would risk a self-inflicted financial crisis in the U.S.. Rather than the U.S. dictating terms from a position of economic strength, the “free world” alliance of creditors was showing Trump the “cliff’s edge” of American vulnerability.

 

 

By undermining the stability of the U.S. bond market and keeping U.S. inflation persistently elevated, the foreign strategy directly interfered with Trump’s goals. Trump’s tariff playbook assumed the U.S. could strong-arm partners without jeopardizing its economic stability, but the bond retaliation forced a rethink. Under pressure, Trump abruptly “paused” or watered down the tariff measures against Canada, Europe, and Japan – a stark reversal from his earlier bluster. In effect, Carney’s coordinated slow-bleed of Treasuries achieved in weeks what traditional diplomacy could not: Trump backed off on tariffs against U.S. allies (while leaving the harshest measures for China only). Canadian and EU negotiators had effectively neutralised the tariff threat not by out-tariffing the U.S., but by targeting the foundation of U.S. economic power – its easy access to credit. 

 

On the inflation front, the strategy has been a double-edged sword for the U.S. Trump’s new tariffs themselves are inflationary – estimates from the Boston Fed suggest this second round of tariffs could add 1.4–2.2 percentage points to core PCE inflation in the coming year, a vastly larger impact than the first trade war. The foreign bond sell-off exacerbates this by weakening the dollar and adding risk premiums, meaning the U.S. now faces stubbornly higher inflation even as growth slows. Federal Reserve officials, once optimistic that inflation would be “transitory,” have been forced to acknowledge the stagflationary risk. By March 2025, the Fed raised its 2025 inflation outlook and noted that price risks are skewed to the upside in part due to tariffs, even as it slashed growth projections – a classic stagflation scenario. In sum, Carney’s alleged “financial war” tactics have derailed the coherence of Trump’s economic strategy. Tariffs, which might have pressured foreign economies in isolation, are being offset through currency shifts and are backfiring through higher domestic U.S. costs. The intended effect – to protect U.S. industries and extract concessions – is nullified or delayed, while the unintended consequences – market turmoil and inflation – are amplified. This strategic checkmate forced Trump to the negotiating table: as one account quipped, “Trump may talk tough, but Carney plays chess”, leveraging global financial interdependence to counter U.S. protectionism. 

 

 

Current Status of the “Financial War”: Bond Market Turmoil, Inflation, and Refinancing Risks 

As of April 2025, the confrontation between the U.S. and its trading partners has shifted from tariff tables to the bond markets – a development some analysts call a “financial war” in parallel to the trade war. Several key features characterise the current state of play: 

 

  • Surging Yields & Bond Market Stress: U.S. Treasury yields remain at multiyear highs amid continued foreign selling and investor skittishness. The 10-year Treasury yield hovers around 4.5%–4.6% (having briefly spiked above 4.9% intraday), while the 30-year yield nears 5%. These levels were last seen in the late 2023 tightening cycle, but the context is now one of easing by the Fed, making the high yields even more striking. Volatility is extreme – the 10-year yield just experienced its three largest single-day swings since 2016. A much-anticipated Treasury auction in early April met tepid demand, confirming that investors require a significant premium (higher yield) to absorb new U.S. debt. Market commentators have openly raised the spectre of a liquidity crisis in Treasuries if a “buyers’ strike” by foreign holders continues. Thus far, domestic institutions (banks, money market funds) have partly filled the gap, but there are limits to their capacity. The Federal Reserve has not intervened directly in the long-term Treasury market yet (it is still engaged in quantitative tightening, slowly shrinking its bond portfolio), but speculation is growing that the Fed may need to pivot back to bond-buying (quantitative easing) to stabilize the market if yields accelerate upwards. In essence, the U.S. is now caught in a vulnerability it hasn’t seen since the 1970s: dependent on the “kindness of strangers” to finance its deficits, at a time when those strangers are strategically retracting that kindness.
  • Persistent Inflation and Stagflation Risk: U.S. inflation, while off its 2022 peak, remains uncomfortably high and looks to be entrenched by the trade and financial cross-currents. Headline CPI is hovering in the mid-4% range year-on-year, and core inflation is stuck above the Federal Reserve’s 2% target. The new tariffs are directly adding to consumer prices (many imported consumer goods from China and elsewhere now carry hefty duties that filter through to retail prices). Additionally, the indirect inflation from a weaker dollar (making all imports costlier) and higher production costs (via interest rates) are beginning to show. The Federal Reserve’s projections now acknowledge inflation will stay above target into 2026-27, a notable shift from prior optimism. Crucially, growth is decelerating at the same time. The Fed expects U.S. GDP growth of only ~1.7% in 2025, down from 2.1% previously, and similar anaemic sub-2% growth in 2026. Such levels, while not a recession outright, represent a significant slowdown – and would mark the first stretch of back-to-back years with <2% growth in over a decade. Unemployment has edged up slightly from historic lows, and business confidence surveys show a pullback in investment plans, citing rising capital costs. All this suggests the U.S. is perilously close to stagflation – a stagnating economy with persistent inflation. Policymakers are candid that stagflation risks are **“rising” and complicating the Fed’s reaction function. Indeed, the usual playbook of cutting interest rates to support growth is partially hamstrung – the “bar for cutting rates is getting higher” as long as inflation risks remain and markets remain volatile. This policy tension was evident in the last Fed meeting: despite clear signs of slowing growth, a faction of officials argued against any rate cuts in 2025, wary that inflation could flare up again. Essentially, the Fed is caught in a tightrope act, pressured to ease financial conditions to calm bond markets, but simultaneously pressured to tighten if the dollar slides or inflation expectations jump. Such an environment – policy at cross-purposes – is reminiscent of the late 1970s dilemma faced by central banks during the oil shocks, underscoring the severity of the current situation.
  • Monetary Policy and Alliance Tensions: The “financial war” has also introduced new tensions among central banks and governments internationally. The European Central Bank (ECB) and Bank of Japan (BOJ) find themselves in delicate positions. Rising U.S. yields have pulled up European and Japanese yields in sympathy, even though their economic conditions would warrant lower rates. For example, Japan’s 10-year government bond yield breached the BOJ’s target cap as global investors sold bonds worldwide, forcing the BOJ to intervene and buy Japanese bonds to maintain control – even as Japan was simultaneously (through the Ministry of Finance) trimming U.S. bond holdings. Europe, meanwhile, is grappling with imported inflation via a weaker euro and higher energy prices (as some commodities are priced in dollars), at the same time its export industries benefit slightly from a stronger dollar. There is a sense of fragmented objectives: allied nations are united in countering Trump’s tariffs, but the spillover of the bond strategy is causing collateral strains in their financial systems. Politically, however, this has only reinforced resolve. European leaders have framed the bond divestment as a “last resort defensive measure” to uphold the rules-based trading system against unilateral U.S. actions. They argue that any short-term pain (like higher yields at home) is the price for avoiding a capitulation to U.S. economic bullying. Canada’s government, with Carney at the helm, has similarly taken a firm tone, emphasizing that “the free world isn’t financing U.S. deficits just to be insulted with tariffs”. Publicly, officials still downplay any notion of “dumping Treasuries” as a hostile act, but data and unofficial briefings indicate a continued gradual reduction of U.S. debt exposure by allied central banks. China, notably absent from the allied coordination, is charting its course – it has steadily reduced its Treasury holdings to about $760 billion (the lowest since 2009), reflecting both geopolitical estrangement and a desire to diversify reserves. Beijing has not dramatically sold off bonds in a “fire sale” manner (which could destabilize markets too quickly), but neither is it stepping in to buy the slack. China’s stance can be seen as tacitly beneficial to the allied strategy: by not countering the rise in yields, China adds pressure on the U.S. without taking direct blame. Meanwhile, China is also suffering under the 104% tariffs from the U.S., but it has allowed the yuan to drift weaker and is pursuing stimulus at home to offset export losses. In effect, U.S. trade adversaries and allies alike have found a common cause in minimizing reliance on the dollar system – a significant geopolitical shift.
  • Debt Refinancing and Fiscal Strains: The U.S. Treasury faces a daunting refinancing calendar in 2025, which could not have come at a worse time. Over 50% of U.S. federal debt matures in 2024–2026, meaning an unprecedented wave of rollovers just as interest rates have jumped. In 2025 alone, roughly $10 trillion in existing debt comes due for refinancing, on top of an expected $1.8 trillion in new deficit spending that must be financed. This $12 trillion financing need in a single year is staggering – about half of U.S. GDP – and will require robust investor demand to avoid further spikes in yields. However, America’s traditional buyers are either stepping back or outright reducing exposure. As one strategist noted, “Our foreign friends are no longer buying our debt and have been trimming their holdings.” Foreign ownership of U.S. Treasuries, which hit a record $8.68 trillion in mid-2024, has slid to about $8.53 trillion by early 2025, and foreign official holdings (central banks) have fallen to their lowest level since the 2020 pandemic crisis. This means the U.S. must increasingly rely on domestic buyers or the Federal Reserve to absorb new issuance. Domestic demand, however, is constrained: U.S. banks are capital-limited and already loaded with Treasuries, and domestic pension funds and insurers can only buy so much without better yields. The result is that the Treasury is paying higher and higher rates to attract marginal buyers, compounding the government’s interest burden. In FY2024 the U.S. paid roughly $870 billion in interest (3.1% of GDP) on $35 trillion debt; in FY2025 that interest bill could easily exceed $1 trillion given the rate jumps. This erodes fiscal space for other spending and is raising alarms: credit rating agencies have put the U.S. on watch, with Moody’s hinting at a potential outlook downgrade in 2025 if fiscal discipline isn’t restored. Washington thus faces a predicament: to finance its government and roll over debts, it may ultimately depend on the Federal Reserve to intervene as buyer-of-last-resort. Some analysts predict the Fed will have to halt QT and resume bond purchases (“QE”) if auctions begin to fail – effectively monetizing debt to prevent a spiral. That would alleviate immediate market stress but at the cost of even higher inflation down the line, truly a Scylla-and-Charybdis choice.

 

 

In summary, the current status of this financial confrontation sees the United States under extraordinary economic strain, with its monetary and fiscal cushions eroding. The U.S. still has immense resources and policy tools at its disposal, but the coordinated actions of foreign creditors have highlighted a key strategic vulnerability: the exorbitant privilege of the dollar and Treasuries can turn into an exorbitant pain when that privilege is deliberately withdrawn. This realization is casting a long shadow over U.S. economic policy, even as behind-the-scenes negotiations intensify to defuse the situation. We next consider how this standoff might evolve by outlining several forward-looking scenarios, along with the motivations and likely steps of the major actors – the U.S., its allies (Canada, Europe, Japan), and China. 

 

 

Forward-Looking Strategic Scenarios 

 

Given the unprecedented nature of this “financial war,” multiple outcomes are possible depending on policy choices and geopolitical dynamics. We present three plausible scenarios, each involving interactions among the United States, its allies (Canada/EU/Japan), and China. For each scenario, we outline the sequence of strategic steps and countersteps and assign a probability based on current trends and actor incentives. 

 

 

Scenario 1: Negotiated Truce and Financial Stabilisation 

 (Probability ~40%)  


Motivation: All sides recognise the mutual damage from escalating economic conflict and seek a face-saving compromise. The U.S. aims to avoid a debt crisis and stagflation spiral, while Canada, Europe, and Japan prefer to stabilize markets and protect their economies from collateral damage. China, facing its growth concerns, is open to de-escalation to avert a severe global downturn. 

 

  • Step 1 (Diplomatic Overtures): The U.S. quietly opens back-channel negotiations with allies to pause or roll back certain tariffs. In return, Canada and the EU agree to halt further Treasury divestments and potentially even reinvest a portion of proceeds back into U.S. debt to signal goodwill. For example, the U.S. might suspend the 25% auto tariffs on Europe/Canada and reduce the tariff rate on some Chinese imports, while G7 allies coordinate statements affirming confidence in U.S. Treasury markets. China could be consulted indirectly; the U.S. might offer to open talks on reducing the 104% China tariffs if Beijing promises not to aggressively dump its U.S. bonds. Each side essentially offers a partial step down: the U.S. eases the trade assault, and the Allies ease the financial pressure.
  • Step 2 (Policy Coordination): With tensions cooling, there is room for policy coordination akin to a modern “Plaza Accord.” The Federal Reserve, ECB, and BOJ communicate closely to manage exchange rates and liquidity. They could, for instance, agree on stabilising the dollar within a certain range – preventing it from collapsing (which would panic U.S. markets) but also from surging (which would hurt others). Central banks may enact swap lines or coordinated forex interventions to smooth volatility. The U.S. Treasury could also reach an understanding with major holders (Japan, EU) to maintain their Treasury holdings near current levels, at least through the crucial 2025 refinancing period. In parallel, Trump’s administration might declare a form of “victory” and enter negotiations for a new trade framework (perhaps invoking a “free-trade reset” summit). Carney and European leaders might seize this moment to push for a reformed global trading system – leveraging Trump’s desire for a win – that addresses some U.S. concerns (e.g. on China’s subsidies) while removing the tariff threats on allies.
  • Step 3 (Stabilisation and Aftermath): Markets respond positively to the de-escalation: Treasury yields gradually pull back as foreign buyers trickle in again and domestic confidence returns. Inflation, while still elevated initially, starts to recede in late 2025 as tariffs are lifted and the dollar stabilises, allowing central banks to maintain or resume easier policy. China, seeing reduced trade pressure, likely stop reducing its Treasury holdings and might even add modestly to reserves if its currency needs support – indirectly aiding U.S. bond demand. The outcome is a tenuous truce: Trump gets to claim that his tough tactics brought allies to the table to “fix” trade issues, and Carney & EU leaders claim they defended the international system and forced the U.S. to respect financial realities. Geopolitically, the Western alliance is bruised but not broken –, having gone to the brink, they may establish new protocols for economic cooperation (perhaps an agreement on not weaponizing finance in future disputes, akin to arms control for the financial war). This scenario leaves the global economy with a chance to avoid recession, though the U.S. likely suffers a lasting credibility dent. The probability of ~40% reflects a moderately high chance because rational self-interest favours compromise: all parties stand to lose from continued escalation. However, it requires political will, especially from Trump, to pivot and portray de-escalation as a win, which is uncertain.

 

 

 

Scenario 2: Protracted Stalemate – Cold Financial War 

 (Probability ~50%) 

 

Motivation: Neither side fully backs down, yet both avoid extreme measures that would trigger an outright crisis. Instead, the conflict enters a slow-burning stalemate. The U.S. continues many of its tariffs and maintains a defiant stance, while allied nations persist in gradual Treasury sales or reduced purchases. Each side hopes the other will eventually capitulate under pressure, but for the foreseeable future they absorb the pain and adjust. China, not being directly part of the “truce,” continues its separate tug-of-war with the U.S. while observing the U.S.-ally impasse. 

 

  • Step 1 (Maintaining Pressure): The U.S. perhaps keeps tariffs in place but refrains from new escalations. Trump might, for example, keep the 104% China tariffs and smaller tariffs on allies formally active but hold off on expanding them or enforcing them stringently. This saves face domestically (“I didn’t cave”) while not provoking fresh retaliation. Allied countries, for their part, maintain their “slow bleed” strategy: their central banks continue to trim Treasury holdings quietly each month, on the order of a few billion here, a few billion there – enough to nudge yields up over time but not enough to cause instant panic. Japan might intermittently sell U.S. bonds when needing to prop up the yen, Europe might let its U.S. holdings run off naturally, and Canada could gradually reduce its stash from $350B downward. China likely stays its course of moderate divestment as well, perhaps aligning with allies tacitly in trajectory if not coordination. Through 2025, this means foreign participation in Treasury auctions remains subdued, and the U.S. bond market must grapple with a persistent demand shortfall.
  • Step 2 (Adaptive Countersteps): The U.S. adapts to this new normal by seeking alternate funding and relief mechanisms. The Treasury may increase reliance on domestic savers – for instance, issuing more short-term bills that banks and money-market funds prefer, or offering higher-yielding longer bonds to entice pension funds. It could also court non-traditional investors (sovereign wealth funds from the Middle East, for example) to make up for G7 absences. The Federal Reserve, while not launching a full QE, might implement tactical measures to support market functioning (e.g. expanding its repo facilities or slowing its balance sheet runoff) to prevent spikes in yields. These are essentially countersteps to manage the financial fallout. Meanwhile, allied governments also adapt: they buffer their economies against U.S. turbulence. Europe might boost fiscal spending to counteract any export losses or use the European Investment Bank to support industries hit by U.S. tariffs. Japan accelerates diversification of its forex reserves (adding euro and gold), insulating itself from the U.S. to a degree. Canada deepens trade ties with Europe and Asia to reduce reliance on U.S. markets, following through on Carney’s public remarks about seeking “greener pastures” away from over-reliance on the U.S. These moves signal a long-term decoupling underway, even as the immediate conflict simmers.
  • Step 3 (Economic Slowdown and Negotiation by Attrition): Through 2025 and into 2026, the U.S. likely experiences a period of stagflationary stagnation – growth languishes around 1% or lower, unemployment gradually rises above 5%, and inflation, while down from the peak, stays around 3–4%. This erodes U.S. consumer and business confidence. Allied economies also feel the drag: Europe and Japan see subpar growth as well, partly from higher interest rates imported from the U.S. and still-reduced trade volumes. Politically, patience starts wearing thin on both sides. U.S. voters approaching the 2026 mid-term elections may punish the administration for economic malaise, pressuring Trump to find a resolution. In allied countries, factions argue that perhaps a new U.S. administration or Congress could be waited out rather than compromising now. China in this scenario might increase its influence by offering limited relief: e.g. quietly buying a small amount of Treasuries when yields are very high (a tactical investment) or cooperating on specific issues like oil price stability, thus positioning itself as a somewhat stabilizing force and scoring diplomatic points with Europe or Japan. Eventually – perhaps by late 2026 – this grind could lead to a belated negotiation, essentially Scenario 1’s diplomacy but enacted after a longer standoff once both sides are economically exhausted. In effect, Scenario 2 is a war of attrition: no decisive moves, just enduring pain until a tipping point is reached. We assign ~50% probability to this outcome, as it aligns with historical tendencies for trade disputes to drag on (e.g. the 2018–2019 U.S.-China trade war only reached a truce after over a year of tit-for-tat). Both Trump and the allied leaders may calculate that time will improve their bargaining position – even as global investors and smaller economies suffer from protracted uncertainty. This scenario is essentially the base case if no bold action is taken: a slower-burning conflict that could still erupt or resolve eventually, but in the meantime produces a weak, inflation-prone global economy.

 

 

 

Scenario 3: All-Out Financial Warfare and Global Realignment 

 (Probability ~10%) 

 

Motivation: This is the tail-risk scenario where miscalculation or hardline ideology on one or both sides leads to full escalation, breaching the point of no return. Trump, emboldened or enraged, might double down on America-First measures despite market chaos, and U.S. allies, rather than blinking, respond in kind with more drastic financial weapons. China in this scenario almost certainly joins the fray opportunistically, since a full U.S. financial crisis would serve its strategic aim of weakening U.S. hegemony (even if it means short-term pain for all). Geopolitical rifts widen dramatically, potentially splitting the global financial system into blocs. 

 

  • Step 1 (Tariff Maximalism and Financial “Nuclear” Options): The U.S. escalates by implementing extreme tariffs universally – for example, Trump could impose across-the-board duties on all imports (not just China and certain sectors). At the same time, the U.S. might take the unprecedented step of weaponizing its debt: one radical idea floated by some hawks is to selectively default on or freeze interest payments to certain foreign holders (effectively saying, “If you sell our bonds to hurt us, we won’t pay you”) – though this would be legally and financially catastrophic, it cannot be ruled out in an extreme nationalist scenario. Alternatively, the U.S. might impose capital controls on outflows to prevent foreign dumping (e.g. restricting foreign central banks from selling too quickly via regulations or informal pressure on custodial banks). These moves would shatter confidence in the U.S. Dollar’s reliability. In response, allied nations and China coordinated an all-out divestment – a true fire sale of Treasuries. Japan and the EU could dump hundreds of billions of U.S. bonds in a short span, and China could aggressively sell its remaining holdings (even at a loss) to signal it won’t fund a hostile U.S. regime. Global markets would convulse: U.S. 10-year yields could skyrocket into the high single-digits, and the dollar would plunge in value against major currencies as well as gold. This is a financial “nuclear” exchange: both sides inflict maximum damage on the other’s economy. The U.S. would be hit with an instant funding crisis, while foreign economies would see their sizable dollar assets suffer and likely face a U.S. consumer market in freefall.
  • Step 2 (Monetary Counterstrike and Economic Fallout): Facing a meltdown, the U.S. would likely resort to the Federal Reserve’s unlimited printing press. The Fed could initiate massive quantitative easing, buying trillions in Treasuries to backstop the market since foreigners won’t. This, however, amounts to effectively monetizing the debt and could lead to hyperinflationary pressures if done on a grand scale. The U.S. might also invoke emergency powers to peg Treasury yields (as was done in WWII), essentially telling the market that yields will not be allowed to rise further – though enforcing such a cap in an environment of collapsing confidence would require extreme measures (like forced bank purchases or direct Fed control of the bond market). Meanwhile, allied countries and China implement their measures to decouple from the dollar system: Europe could declare an intention to invoice more of its trade in euros, establish alternative payment systems (building on efforts like INSTEX and expanding digital euro initiatives), and perhaps even start discussing a new reserve asset consortium (revisiting ideas akin to Carney’s 2019 proposal of a “synthetic hegemonic currency” to replace the dollar ). China and Russia (and other BRICS nations) might accelerate the launch of a BRICS digital currency or increase gold-backed trade notes to transact outside the dollar. Essentially, the global financial architecture would split – with the U.S. and a few close allies on one side, and a new bloc of major economies on the other forming a parallel system.
  • Step 3 (Global Recession and Realignment): The immediate consequence of an all-out financial war would be a severe global recession or even depression. The U.S. would experience a funding crisis: despite the Fed’s efforts, credit markets could freeze (akin to 2008 but with sovereign debt at the epicentre). Government funding for basic operations might come into question, and emergency austerity or debt restructuring could loom. Inflation in the U.S. could spiral if the dollar’s value collapses – worst-case stagflation reminiscent of the 1970s or Weimar-style scenarios if mismanaged. U.S. allies, having expended their financial arsenal, would also face turmoil – their currencies might surge too high (hurting exporters) and their financial institutions could suffer losses on U.S. assets. However, being net creditors and with more conservative fiscal positions, they may weather it slightly better and could form a tighter financial alliance among themselves (e.g. greater EU-Japan-Canada cooperation, perhaps IMF coordination to assist each other). China and other U.S. rivals would suffer export losses but might seize the opportunity to position the yuan (or a bloc currency) as a new reserve reference. Over the longer term, this scenario leads to a fundamental realignment of global finance: the U.S. dollar would lose its singular reserve currency status (as trust in U.S. Treasuries would be broken), and we could see a bifurcated system – perhaps half the world using a dollar/euro sphere and the other half using a China-led or commodity-backed currency framework. Geopolitically, it would cement divisions akin to a new Cold War, with an economic iron curtain in finance. This is an extreme scenario and thus we assign it ~10% probability: it requires maximal miscalculation and willingness to absorb catastrophic costs. It is essentially Mutually Assured Destruction (MAD) in the economic realm, so all rational actors would try to avoid reaching this point. However, given the high stakes and unpredictable political pressures, it remains a non-zero risk.

 

 

Probability Assessment: The most likely path at this juncture appears to be a continued stalemate with periodic partial compromises – essentially a blend of Scenarios 1 and 2 leaning toward protraction. We attach the highest single probability to Scenario 2 (around 50%) because the initial moves in that direction are already evident (tariffs largely still in place, and foreign selling continuing at a measured pace ). Scenario 1, a negotiated easing, has decent odds (40%) given the evident pain and the rational incentives to recalibrate – its chances may increase if market stress worsens enough to concentrate minds in Washington and allied capitals. Scenario 3 remains a low-probability but high-impact tail risk (10%), which policymakers will strive to stave off, yet its mere possibility will influence strategy (much as the unthinkable prospect of default or currency collapse can spur preventative action). 

 

Each scenario’s likelihood will continuously evolve with political developments. Key signposts to watch include U.S. domestic politics (e.g. election outcomes, which could alter Trump’s calculus or even remove him from the equation in 2025/26), the unity of the allied front (changes in leadership in Canada or Europe that might soften or harden the stance on U.S. bonds), and China’s posture (whether it remains relatively hands-off or decides to escalate its financial retaliation, for instance through a surprise large Treasury sell-off or aggressive de-dollarisation moves). The interplay of economic and geopolitical motivations is fluid: for the allies, preserving the global rules-based order and their economic stability are paramount, but they must also consider security ties with the U.S. (a factor that has so far not been overtly linked but underlies the trust eroded by Trump’s actions). For the U.S., balancing short-term political wins from tariffs against long-term financial stability is the crux; a lesson may be drawn that even a superpower cannot separate its trade policy from its financial dependence. 

 

In conclusion, Marc Carney’s purported plan of coordinated Treasury divestment has vividly demonstrated the power of financial statecraft in a globalised era. It has undermined a unilateral U.S. tariff strategy by turning the strength of the U.S. (the dollar debt market) into a source of weakness. The resulting surge in yields and persistent inflation have put the U.S. on the defensive, even as it was the one launching the trade offensive. The situation remains volatile, but it has opened a new chapter in geo-economic relations – one where debt and reserves are deployed as strategic weapons. How this “financial war” ends will set critical precedents for the future of the international economic order, the sanctity of the U.S. dollar, and the art of balance of power in a multipolar financial world. The stakes could not be higher, and the coming months will test the wisdom and resolve of leaders on all sides. 

 

Sources: Recent economic data and analysis have been cross-verified with official reports and credible financial media. Key insights on Treasury market dynamics and foreign holdings were drawn from U.S. Treasury TIC data and analyses by market experts. Testimonies of the strategy’s origin and effect come from contemporary accounts and commentary by political and economic observers. Macroeconomic impacts and scenario projections incorporate findings from central bank research and the Federal Reserve’s communications. These references and the uploaded document on global trade dynamics provided a factual foundation for evaluating how extraordinary coordination of sovereign financial power has challenged U.S. policy, raising profound implications for global economic governance.