Foreign investors have shifted their preferences toward U.S. stocks over government bonds, marking a notable change in international capital flows amid growing concerns about inflation and the rising national debt. Data analyzed by Deutsche Bank reveals that in the year leading up to June, foreign investments in U.S. equities averaged 2.8 percent of American GDP, surpassing investments in U.S. Treasuries, which stood at 2 percent of GDP. This shift is the first of its kind outside brief intervals during the Covid-19 pandemic and the aftermath of the global financial crisis.

The increasing appeal of U.S. stocks is driven in part by a robust performance in the equity markets. The S&P 500 index is on course for a fourth consecutive year of double-digit gains, supported largely by heavy investments in artificial intelligence, which have boosted corporate profit margins to record levels, according to FactSet data dating back to 2009.

Conversely, U.S. Treasury securities, traditionally viewed as a risk-free investment, are facing challenges. Investors are growing more cautious about lending to heavily indebted governments, especially as the fiscal outlook for the U.S. government continues to deteriorate. The 10-year Treasury yield recently reached its highest point since 2007, reflecting heightened concerns.

George Saravelos, global head of foreign exchange research at Deutsche Bank, described the trend as a “huge shift in U.S. asset markets,” highlighting the contrast between a booming private sector balance sheet and a worsening public sector balance sheet. Saravelos noted that U.S. assets are “no longer the safe but the risky asset of choice.”

Investor sentiment toward U.S. assets experienced a downturn early last year after President Donald Trump introduced broad tariffs in April, sparking fears about the sustainability of U.S. economic dominance. However, the sell-off was short-lived, as enthusiasm for gains in AI-driven stocks quickly returned, pushing Wall Street to record highs. Despite this, the Treasury market remains under pressure, influenced by broader global concerns over debt levels and inflation across developed economies.

James Turner, head of global fixed income for the Europe, Middle East, and Africa region at BlackRock, emphasized that government bonds no longer carry the same risk-free status. He pointed to the scale of U.S. deficits and warned that if the government’s financial position were comparable to a corporation, it would not be considered risk-free.

The U.S. government’s debt recently surpassed $40 trillion, with ongoing fiscal deficits intensifying worries about long-term sustainability. Treasury yields have reflected these pressures; the yield on 30-year bonds has risen from 4.83 percent to 5.32 percent so far this year, indicating falling prices.

In response to these developments, Norway’s sovereign wealth fund, valued at $2.3 trillion, has proposed reducing its U.S. Treasury holdings by approximately $80 billion, shifting to other government-backed debt such as mortgage-backed securities. Maria Vietname, head of equity research at State Street, reported a similar trend among institutional investors who are increasing equity allocations at the expense of government bonds. Vietname noted that concerns about U.S. fiscal discipline are making corporate fundamentals appear significantly stronger in comparison to government creditworthiness.