U.S. Politics Are a Systemic Risk to Global Markets

Higher U.S. political risk is steepening the U.S. Treasury yield curve, Mark Y. Rosenberg writes. (Michael Nagle/Bloomberg)

About the author: Mark Y. Rosenberg is founder of GeoQuant and an adjunct professor at UC Berkeley.

For years, I have been warning in this publication and others of the “EM-ification” of the U.S., whereby weaker political institutions begin to undermine political and economic stability.

Those warnings now seem quaint.

Political instability has become the primary driver of uncertainty in the world’s apex economy. Political violence is rising. The independence of the central bank, the government’s primary statistics agency, and its regulatory agencies are under sustained attack. The rule of law is being undermined by partisanship, and the government’s security forces are increasingly politicized. Polarizing social conflicts have become institutional conflicts, driving everything from public-health crises to militarized tensions between the federal government and U.S. cities. Helter Skelter protectionism, expropriation, regulatory uncertainty, and favoritism are now the order of the day.

Per GeoQuant data, the U.S. has had a level of political risk closer to an emerging market than a developed one since mid-2021. That trend has accelerated rapidly in 2025.

But, as the There is No Alternative (TINA) crowd will remind you, the U.S. is also home to the world’s largest and most resilient economy, its deepest and most liquid capital markets, its reserve currency, and the benchmark sovereign debt—all backed by its most powerful military. While global investors may be more exposed than ever to EM-style political risks, they also have no choice but to remain so.

The price of gold continues to skyrocket—a telltale sign of increasing risks. But so does the S&P 500, as opportunities from fiscal stimulus, looser monetary policy, and bets on politically favored sectors fuel animal spirits. The bond market stages brief revolts and long-term Treasury yields are rising, but investors otherwise continue buying into “American exceptionalism” with the spike in U.S. tariff revenue reportedly a fiscal boon. The dollar is having a bad year, but that is just a hedging exercise; capital flight or sudden stops are simply not an option for the world’s reserve currency. So the TINA thinking goes.

Institutions are weaker, society is more polarized, economic and financial outcomes are less predictable. Per the most recent Nobel Prize in economics, all of this is supposed to undermine growth and financial stability. But growth and stability take a long time, and markets are impatient. Will TINA ensure “American exceptionalism” remains a profitable bet?

According to GeoQuant data, probably not. Here’s why.

Most strikingly, the daily correlation between GeoQuant’s U.S. Political Risk score and the gold price has been strongly positive since 2018. The correlation defies controls for interest rates, inflation, and the U.S. dollar exchange rate. While broader demand for gold under Trump 2.0 has strengthened the relationship, it builds on a structural trend whereby higher U.S. political risk has driven central banks to increase gold reserves. Some now say central banks may now own more gold than Treasuries. Like gold, the dollar had historically been positively associated with U.S. political risk. The world’s reserve currency has provided a haven, even from U.S.-generated risks.

But this correlation has turned strongly negative. Since “Liberation Day,” higher risk has pushed the dollar lower, even as 10-year Treasury yields stay elevated. Higher U.S. political risk is clearly steepening the Treasury yield curve, with rising 30-year yields reflecting greater sovereign risk and lower shorter-term yields showing concerns about growth. Foreign demand for U.S. Treasuries overall is weakening, and the spread between U.S. and investment-grade EM bonds are near a 18-year low. This trend started before April 2, but it is still mostly a function of political-risk weakening the dollar.

It is true that there is no alternative to the dollar and Treasuries. But that reality is no longer a useful hedge. Instead, it must increasingly be hedged against.

This is a very precarious position for the financial instruments that grease the wheels of the global financial system. Given growing national debt and declining institutional credibility, the “full faith and credit” of the government behind them is arguably less secure than any time since World War I. Just as the 2008-9 crisis in the wider U.S. housing market very quickly became a global financial crisis, now a material crisis in the American political system—say, a violently contested 2026 midterm election, a prolonged government shutdown, a constitutional crisis regarding tariffs, or collapsed Fed independence, physical clashes between federal and local law enforcement in a major U.S. city—could trigger a similar contagion.

This time, however, the U.S. sovereign won’t be a haven from risk, but rather the source of risk itself. In that scenario, TINA might not apply.

The last time global markets were rattled by EM-style political risks was in the early 2020s, when China launched a regulatory crackdown, decoupled from the West, and dealt with an ensuing debt crisis. Capital fled the world’s second largest economy. Many of China’s domestic economic indicators have yet to recover.

The disruptions of Trump 2.0 make Chinese risks second fiddle. As a result, China is ascendant once more, with Russia and India on its coattails. Both autocracy and autarky are on the rise, subverting institutions and norms to personalism, raw power, and pomp.

If the U.S. follows suit, will its history of innovation and economic dynamism be enough? Can America’s 21 st century economy prosper in the face of 19 th century politics?

Don’t bet on it.

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