The “set and forget” allocation strategies of 2025 won’t work. The US and Asia are no longer moving in tandem—they are decoupling in correlation but recoupling in opportunity. And the institutional investors who recognize this divergence earliest will be the ones positioned to capture asymmetric returns across the corridor over the next twelve to eighteen months.
The opening weeks of 2026 have delivered a level of cross-asset volatility that has forced a reassessment of assumptions baked into year-end positioning. Between a contested US Treasury market, a looming regime change at the Federal Reserve, and accelerating capital reallocation across Asia, the macro landscape demands a more dynamic framework than most allocation models currently provide. This is not a call to de-risk. It is a call to re-calibrate.
The Treasury Market Is Telling You Something—Listen Carefully
The US Treasury market has entered a period of structural noise that cannot be dismissed as seasonal. Reports this week confirmed that Chinese regulators have advised domestic financial institutions to rein in their holdings of US government bonds, citing market volatility concerns. China-based investors’ Treasury holdings have now fallen to approximately $682 billion—the lowest level since 2008—down from a peak of $1.32 trillion reached in late 2013. Add in the broader BRIC trend: Brazil’s holdings have dropped from $229 billion to $168 billion over the past twelve months, India from $234 billion to $186 billion. The direction of travel is unmistakable.
Simultaneously, European institutional capital is hedging dollar exposure at an accelerating pace. A CoreData survey found that 63% of European investors had already reduced US exposure following the tariff escalation cycle, with 82% planning long-term reductions. Danish pension funds have sold approximately $1.5 billion in Treasuries outright, citing policy uncertainty and sovereign debt sustainability concerns. While the coordinated “sell America” scenario remains unlikely—European banks still depend on Treasuries as dollar-funding collateral and a forced sell-off would spike the euro against their export interests—the gradual rotation is real, persistent, and repricing duration risk at the margin.
The practical impact is straightforward: the marginal buyer of long-duration US sovereign debt is shifting. Official foreign holders are reducing exposure. The private sector, for now, has absorbed the supply, and overall overseas Treasury holdings reached record levels in the most recent data. But the composition of that demand is changing in ways that matter for term premium and for the clearing price of duration going forward—particularly as a new Federal Reserve chair prepares to take the helm.
The Warsh Fed: What “Privatization of the Balance Sheet” Means for Asset Prices
Kevin Warsh’s nomination as the next Federal Reserve chair introduces the most consequential philosophical shift in US monetary policy leadership since the post-crisis era. The market’s initial read—easing short-term fears about Fed independence, moderate rate cuts in the near term—is correct but incomplete. The deeper signal lies in what Warsh intends to do with the Fed’s $6.6 trillion balance sheet.
Warsh has been a long-standing critic of quantitative easing, arguing that an outsized central bank footprint distorts asset pricing and crowds out private-sector intermediation. His intellectual framework centers on what analysts are now calling “privatization of the Fed balance sheet”: shrinking the Fed’s ownership of Treasuries while using bank deregulation—specifically reforms to the Supplementary Leverage Ratio (SLR)—to incentivize commercial banks to absorb the supply. In theory, less stringent capital requirements allow bank balance sheets to grow even as the Fed’s balance sheet contracts, maintaining system-wide liquidity without the central bank acting as a permanent backstop.
Investors should interpret this through two lenses. First, the mechanical link between the Fed’s balance sheet and risk-asset performance has weakened considerably since the onset of quantitative tightening in 2022. The S&P 500 continued to make new highs throughout a $3.5 trillion balance sheet reduction. Fiscal stimulus, earnings growth, and AI-driven capital expenditure have proven more than capable of supporting equity valuations independent of the Fed’s asset holdings. This means a Warsh-led contraction is not, by itself, a reason to de-risk equity exposure.
Second, however, the clearing price for duration will almost certainly rise. If the Fed allows its $4.2 trillion in Treasury holdings to mature and roll off into private markets, the supply-demand dynamics for longer-dated bonds shift materially. Warsh’s problem, as several strategists have noted, is that the refinancing calendar remains aggressive—roughly $9 trillion of mostly short-term bills were rolled over last year alone—and the federal government is already paying over $1 trillion annually in interest on the national debt. A structural repricing of the long end, even a gradual one, creates a fiscal feedback loop that constrains policy flexibility.
There is a credible counter-argument that Warsh will prove more pragmatic than his rhetoric suggests. A smaller balance sheet could conflict with the administration’s preference for lower long-term borrowing rates and lower mortgage rates specifically, creating political tension that constrains the pace of contraction. And monetary policy remains a committee decision—seven governors and five regional presidents vote at each meeting, ensuring continuity even as leadership transitions. Wells Fargo’s economics team has noted that they do not expect Warsh to meaningfully shrink the balance sheet during his tenure, given the Fed’s shift to an “ample reserves” operating framework that makes a return to pre-2008 levels structurally impractical.
But the market is not waiting for confirmation. The signaling effect alone is repricing expectations. Investors are already positioning for a world in which the Fed plays a smaller role in financial market liquidity and the private sector—enabled by deregulation—absorbs a larger share of the intermediation function. This is a structural shift in the plumbing of the system, not a cyclical adjustment.
For allocators, the actionable takeaway is a regime shift in duration management. The Warsh Fed is likely to deliver lower policy rates in the near term—markets currently price two to three cuts from the current 3.5-3.75% range—while simultaneously introducing upward pressure on term premium at the long end. This is a steepener. Portfolios constructed around the flattening bias of the Powell era need to be re-examined. Short-to-intermediate credit, floating-rate structures, and selective equity duration exposure are favored over long-dated sovereign holdings in this environment.
There are, however, risks to the bull steepener thesis that could offset the growth trade if left unhedged. If balance sheet normalization outpaces the private sector’s capacity to absorb duration—particularly if deregulatory relief on SLR and capital requirements is slower to materialize than markets expect—the resulting reserve scarcity could produce disorderly rate volatility reminiscent of the September 2019 repo episode. In that scenario, a widening in credit spreads and a repricing of risk assets would undermine the equity rotation the steepening curve is meant to support. Similarly, an acceleration in foreign official Treasury selling beyond the current measured pace could push long-end repricing from a healthy term premium adjustment into something the market interprets as a fiscal sustainability signal, tightening financial conditions in a way that works against both legs of the trade. These are not base case outcomes, but they are plausible enough to warrant disciplined position sizing and maintaining convexity protection alongside any steepener exposure.
Asia: Decoupling in Correlation, Recoupling in Opportunity
If the US Treasury market is repricing the cost of fiscal dominance, Asia is repricing the value of structural independence. The two narratives are deeply connected, and the US-Asia corridor is where the most interesting asymmetries are forming.
Asia ex-Japan equities continue to trade at a meaningful discount to developed markets, with earnings growth projected to re-accelerate to 13-14% annually in 2026 and 2027—up from roughly 11% in 2025. Positioning by active emerging markets funds in Indian equity exposure sits near the 0-1st percentile, creating a contrarian setup in a market where domestic economic indicators are improving and the new administration’s moderately expansionary fiscal program balances welfare spending with technology and defense investment.
China presents a more nuanced picture. The headline risk—tariff escalation, Treasury selling, geopolitical friction—obscures a ground-level reality of accelerating innovation in healthcare, semiconductors, AI, and advanced manufacturing. Industry consolidation is reducing the overcapacity that plagued prior cycles, and the 15th Five-Year Plan reinforces commitments to breakthroughs in core technologies designed to reduce reliance on foreign supply chains. Rebounding sentiment, combined with valuations that offer a significant discount to historical norms, has drawn renewed interest from global private capital allocators. KKR has indicated that it expects Asia Pacific to account for half of its global private equity distributions, a signal that cannot be ignored by institutional participants still underweight the region.
Southeast Asia, meanwhile, is emerging as the structural beneficiary of supply chain diversification at scale. ASEAN’s exports to the US have risen from roughly 10% to nearly 17% of the bloc’s total exports over the past decade, and BCG forecasts that ASEAN exports will surge by nearly 90% to approximately $3.2 trillion annually by 2031. India attracted $76 billion in greenfield FDI in 2024, surpassing both Germany and the UK to become the top Asian destination for manufacturing investment—driven not only by cost advantages but by a decade of hard and soft infrastructure investment that has fundamentally improved the country’s competitiveness in advanced manufacturing, including semiconductors.
The key insight for corridor allocators is that Asia’s growth story is no longer a single-factor China bet. It is a diversified, multi-node ecosystem where India, Vietnam, Indonesia, Malaysia, and Singapore each play distinct roles in AI infrastructure, energy transition, digital commerce, and advanced manufacturing supply chains. The ASEAN Digital Economy Framework Agreement, expected to conclude in 2026, will establish the world’s first regional digital governance framework, potentially doubling the bloc’s digital economy to $2 trillion by 2030.
Positioning for the New Regime
The convergence of a structurally noisy Treasury market, a philosophically different Fed chair, and an accelerating Asian growth cycle demands an allocation framework that is both more active and more granular than what worked in 2025.
Duration management must evolve. The curve steepening implied by the Warsh Fed favors short-to-intermediate exposure and floating-rate instruments over long sovereign holdings. Portfolios should be positioned for a world in which the policy rate falls while term premium rises—an unusual combination that rewards precision.
Asia exposure should be rebuilt with geographic specificity. The era of broad-based EM allocation is giving way to a more surgical approach: India for manufacturing and consumption growth, ASEAN for supply chain relocation and digital infrastructure, China for innovation-driven sectors with domestic demand support, and Japan for corporate governance reform and selective cyclical exposure.
Cross-border capital flows require active monitoring. The gradual rotation of official foreign holders out of US Treasuries, the hedging behavior of European institutions, and the repatriation of Japanese capital from US fixed income all create opportunities in relative value, currency, and rates that passive frameworks will miss. Japanese institutional investors—banks and life insurers—have already begun repatriating US fixed income allocations, rotating into Japanese Government Bonds and booking year-end profits on long-duration US holdings. European funds are exhibiting a structural shift toward increased home bias after years of US fixed income overweights. These flows are not temporary—they reflect a fundamental reassessment of the risk-reward profile of dollar-denominated fixed income in a world where US fiscal trajectory and policy unpredictability have become persistent rather than episodic concerns.
The currency overlay deserves particular attention. The consensus expectation for a weaker dollar in 2026 is driven not by capital flight but by foreign investors increasing their hedge ratios on US asset exposure. This distinction matters: it means the dollar can weaken without outright selling of US assets, creating a unique backdrop in which US equities can perform while the dollar depreciates—a historically unusual combination that benefits unhedged Asian equity exposure for dollar-based allocators.
The US-Asia corridor has not closed. It has restructured. The allocators who adapt their frameworks to this new architecture—rather than waiting for the old correlations to reassert themselves—will define the next cycle’s outperformers.
This article reflects our team’s analysis as of February 2026 and is intended for institutional and professional investors only. It does not constitute investment advice. Past performance is not indicative of future results. Mirae Asset Securities (USA) Inc. (“Mirae”) is providing this market commentary solely for the use of the institutional investors to whom this message is addressed. The commentary does not constitute “research” as defined by relevant FINRA or SEC rules, and thus the commentary was prepared by personnel who are neither engaged in the preparation of research reports nor are required to register as research analysts. In addition, the market commentary contained in this message is not subject to the independence and disclosure standards and requirements applicable to investment research reports. Please be advised that Mirae may trade the securities covered in the commentary on a principal basis (for itself) and on an agency basis (for clients). Such trading may be contrary to the commentary. THIS MATERIAL IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE AN INVITATION OR OFFER TO SUBSCRIBE FOR OR PURCHASE ANY SECURITIES OR SERVICES MENTIONED. BY PROVIDING THIS M