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[Klement: Investors Have Misunderstood the Dollar Depreciation Trade; the Real Risk Lies in US Treasuries] ⑴ Panmure Liberum investment strategist Joachim Klement writes that discussions about the "dollar depreciation trade" are ubiquitous, but one risk indicator shows investors are completely wrong: they are overestimating the troubles facing the dollar while underestimating the threats to US Treasury bonds. ⑵ The dollar has depreciated against all major currencies over the past 12 months, and precious metals such as gold have surged to record highs, but this is not a simple depreciation trade. The depreciation trade involves two levels: first, investors worry that if they are dissatisfied with US policies, money managers will reduce their dollar exposure, potentially causing it to lose its safe-haven and reserve currency status; second, there are concerns that a deteriorating US fiscal situation could ultimately lead to a sharp depreciation or even default on Treasury bonds. ⑶ On the surface, both of these concerns seem weak. The dollar fell by about 10% last year, but rose by about 50% in the previous decade, far from losing its reserve currency status. Treasury yields have also not sounded alarm bells. (4) Another way to gauge investor unease about the dollar or Treasury bonds is to look at their “convenience yield”—the difference between the yield on directly holding dollars or Treasury bonds and the yield on creating synthetic assets through currency and options trading. These transactions are typically made by some of the world’s most sophisticated investors, such as hedge funds and central banks; if they are concerned about a depreciating dollar, the convenience yield should decline. (5) Over the past decade, the convenience yield on the dollar against the euro has remained stable and positive, indicating that investors prefer to hold dollars rather than replicate them. However, the convenience yield on Treasury bonds against German bonds has actually turned negative over the past 15 years, suggesting that investors perceive holding 10-year Treasury bonds as riskier than replicating them with German bonds. (6) It is noteworthy that the decline in the convenience yield on Treasury bonds occurred primarily in the 2010s, when the US began to sustain a massive deficit of approximately 4% or more of GDP. However, in the past six months, the convenience yield on Treasury bonds against German bonds has risen, reflecting Germany’s increased defense and infrastructure spending after years of budget austerity, narrowing the fiscal gap with the US. (7) Klement argues that, given the trajectory of US fiscal policy, are investors actually underestimating the risk of Treasury devaluation? The persistently large US deficit provides ample supply, and overseas investors now have more options. If the Supreme Court rules Trump's tariffs under IEEPA illegal, $100 billion to $130 billion in revenue could disappear annually, or even require tax refunds, potentially causing a significant deterioration in the fiscal situation almost overnight. (8) Even if the government re-imposes tariffs through other legislation, the new rates may be lowered due to legal constraints, and implementation will take time. This means that the Congressional Budget Office's projection of a US deficit of approximately 5.8% in fiscal year 2026, and many economists' estimates exceeding 6.0%, are likely to rise significantly further, and current Treasury bond yields may be far from high enough.