Author: Kip Lytel, CFA, Montecito Capital Management

Does Your Advisor Have a Plan For Debt-driven Dollar Reckoning?

For decades, investors have been told that the safest course of action is simple: buy, hold, rebalance, repeat. It’s a strategy that worked well during a long era of falling interest rates, expanding globalization, and unquestioned confidence in the U.S. dollar.

But history rarely moves in straight lines. And today, the risks sitting quietly in the background are no longer theoretical.

The elephant in the room is U.S. debt—and the pressure it places on the dollar, Treasuries, and portfolios built on the assumption that yesterday’s playbook will always work tomorrow.

The Debt Problem Isn’t Political—It’s Mathematical

U.S. federal debt has now surpassed $28 trillion and continues to grow faster than the U.S. economy itself. When debt expands more rapidly than the nation’s productive capacity, the gap has to be filled somehow—through higher taxes, inflation, financial repression, or currency debasement. There is no painless option.

Markets may ignore this imbalance for long stretches of time. They always do—until they don’t. When confidence shifts, it tends to happen quickly and without warning.

Buy-and-hold strategies that assume Treasuries will always act as a ballast, and the dollar will always be the unquestioned reserve currency, may be far more fragile than most investors realize.

Treasury Demand Is Changing—Quietly, but Meaningfully

One of the most important developments over the past several years has been the decline in foreign demand for U.S. Treasuries. By mid-2025, market strategists began highlighting a “Sell America” sentiment among overseas investors. This was exacerbated by May 2025, when Moody’s became the final major rating agency to strip the U.S. of its prime AAA rating, citing unchecked deficit expansion and a lack of fiscal discipline. Consequently, foreign official holdings—the securities central banks park at the Federal Reserve—dropped by approximately $48 billion in just a few months during early 202

Foreign governments and institutions have become less enthusiastic buyers for several reasons:

  • Rising deficits and issuance are flooding the market with supply.
  • Lower real yields—especially when adjusted for inflation—make Treasuries less attractive.
  • Federal Reserve rate cuts, when they arrive, reduce future yield potential.
  • Currency risk has become increasingly visible.

For foreign buyers, Treasuries are not just an interest-rate investment—they are a dollar investment. When the U.S. dollar weakens, those investors can lose money even if the bond itself performs as expected. Recently, currency effects alone have erased gains for some foreign holders.

That dynamic matters. If Treasuries are no longer viewed as a one-way safe haven, the entire foundation of traditional portfolio construction deserves scrutiny.

Disappointing Treasury Auction Outcomes

The weakening demand has manifested in several high-profile “failed” or weak auctions characterized by high “tails” (when the final high yield is much higher than the expected market rate).

  • The 20-Year Bond Struggle: In May 2025, a 20-year bond auction saw its lowest foreign participation since July 2020. The auction “tailed” by 1.1 basis points, signaling that the Treasury had to offer much higher yields than expected to clear the market.
  • The 30-Year Bond Slump: In February 2025, a $25 billion 30-year bond auction tailed by 1.2 basis points as the bid-to-cover ratio—a key measure of demand—fell from 2.52 in the previous auction to 2.33.

Structural Decline in Treasury Ownership

The foreign share of total U.S. debt has undergone a significant structural decline. While foreigners held roughly 50% of U.S. Treasuries in 2013, that share dropped to 33% by 2024 and approximately 29% by mid-2025.

This shift is particularly pronounced among foreign official sectors (central banks), while private investors (hedge funds and private banks) now make up a larger portion of the remaining foreign demand—reaching 57% of total foreign ownership by late 2025.

The Dollar Is Still Dominant—but the Cracks Are Forming

To be clear, the U.S. dollar is not disappearing tomorrow.

  • It remains involved in roughly 88% of global foreign exchange transactions, a figure that has held steady for decades.
  • Approximately 54% of global trade invoices are denominated in dollars—even when the U.S. is not a direct party to the transaction.
  • The dollar still accounts for about 58% of global foreign currency reserves held by central banks.

Those numbers confirm continued dominance. But dominance does not mean permanence.

What’s changing is behavior at the margin—and margins are where regime shifts begin.

Central Banks Are Voting with Their Balance Sheets

For the first time since the mid-1990s, physical gold has surpassed U.S. Treasuries in total value held by global central banks, with estimates placing gold reserves near $4.5–$4.6 trillion.

Perhaps the most symbolic fact of 2025 is that global central banks now hold more reserves in gold than in U.S. Treasuries. In a historic crossover, gold’s value in official reserves surpassed that of U.S. government debt, marking a 30-year high in gold’s dominance as central banks prioritize “hard money” that cannot default over dollar-denominated debt.

Between 2022 and 2024, central banks purchased more than 1,000 metric tonnes of gold per year, roughly double the pace of the prior decade. Over the past three years alone, cumulative purchases totaled approximately 3,220 tonnes.

This is not speculation. It is diversification.

Gold’s share of global reserves has risen sharply—moving from roughly 15% just a few years ago to an estimated 27–30% today—driven by geopolitical instability, concerns about currency weaponization, and record gold prices exceeding $4,300 per ounce in recent estimates.

The largest holders of gold remain unchanged:

  • United States: 8,133 tonnes (≈ $865 billion)
  • Germany: 3,352 tonnes (≈ $356 billion)
  • Italy: 2,452 tonnes (≈ $261 billion)

Central banks are not emotional investors. When they shift reserves at this scale, it signals a long-term reassessment of risk.

The Real Risk: No Plan Beyond Buy-and-Hold

The most underappreciated risk facing investors today is not a sudden market crash—it’s advisor complacency.

After more than a decade of rising markets and policy backstops, much of the advisory industry has become conditioned to a single narrative: stay invested, ignore macro risks, and trust that diversification will eventually work itself out. For many advisors, “strategy” has quietly become synonymous with inertia.

In practice, this means:

  • No explicit plan for dollar weakness or declining purchasing power.
  • No framework for sovereign debt stress, despite historic issuance levels.
  • Overreliance on traditional stock-and-bond diversification, even as correlations rise during periods of stress.
  • Little or no ability to act tactically, because portfolios are locked into static models or outsourced allocations.

Buy-and-hold is not, by itself, a risk management strategy—it is a behavioral assumption. It assumes that time will always heal volatility, that liquidity will always be there when needed, and that policy makers will always succeed in stabilizing markets without consequence.

History suggests otherwise.

When inflation accelerates, currencies weaken, or confidence in government balance sheets erodes, the damage does not show up gradually. It tends to arrive in sharp repricings—gaps lower in asset values, sudden correlation spikes, and forced selling at precisely the wrong time.

For investors working with advisors who have no pre-defined playbook beyond “stay the course,” these moments can permanently impair wealth.

A resilient strategy is not about predicting the exact trigger—it’s about acknowledging that structural risks exist and preparing before markets force the adjustment.

A Fragile Banking System Hiding in Plain Sight

Another risk rarely addressed in traditional portfolio conversations is the growing fragility of the U.S. banking system itself.

We’ve seen this movie before. In 2008, Bear Stearns collapsed, Lehman Brothers failed, and Citigroup came perilously close to failure without extraordinary government intervention. Those events were widely framed as once-in-a-generation anomalies. Yet more recently, similar stress has surfaced in the regional banking sector. Silicon Valley Bank and Signature Bank both failed in March 2023, followed by First Republic Bank in May 2023 – three of the largest bank failures in U.S. history. In 2024, Republic First Bank in Philadelphia was seized by regulators, and in 2025, Santa Anna National Bank in Texas was closed by regulators, highlighting that bank closures haven’t disappeared even in a recovering economy.

Today’s banking system remains highly leveraged, deeply interconnected, and increasingly exposed to interest-rate and liquidity risk. Recent regional bank failures served as a reminder that confidence — not capital — is often the true fault line. Deposits can flee faster than balance sheets can adjust, especially in a digital banking environment where withdrawals happen with a swipe.

Compounding this vulnerability, regulatory safeguards have been loosened. Reserve and liquidity requirements that were once viewed as essential buffers have been reduced or reinterpreted in ways that prioritize credit expansion over systemic resilience. On paper, banks may appear compliant; in practice, they are often far less prepared for sudden stress than headlines suggest.

Andrew Ross Sorkin’s recent book 1929: Inside the Greatest Crash in Wall Street History draws compelling parallels between the conditions that led to the 1929 crash and today’s market environment. He highlights how overconfidence, debt-fueled speculation, and a sense of invincibility among investors and institutions can build dangerous imbalances. Today’s markets display similar characteristics: elevated valuations, widespread use of leverage, and a general complacency toward systemic risk. The lesson is clear: history does not repeat exactly, but the forces of human behavior, financial excess, and regulatory blind spots can create vulnerabilities that portfolios ignoring them are ill-equipped to handle.

The lesson is not that banks will fail tomorrow – but that portfolios built on blind trust in financial intermediaries, without hedges, alternatives, or assets held outside the system, are exposed to risks most investors are never shown.

What Montecito Capital Management Does Differently

At Montecito Capital Management, we don’t build portfolios based on blind faith in a single outcome. We prepare for a range of possibilities.

Today, our client portfolios already incorporate risk mitagation:

  • Approximately 8% exposure to precious metals ETFs, providing a hedge against currency debasement and financial system stress.
  • Equity loss-buffer ETFs, designed to soften drawdowns during market corrections while still allowing for participation in upside markets.
  • Alternative assets with historically low correlation to traditional stock and bond markets – strategies that depend on outcomes, not market direction.

We also maintain tactical flexibility:

  • The ability to shift portfolio currency exposure toward traditional safe havens such as the Swiss franc, and selectively into others like the Swedish krona (SEK) when conditions warrant.
  • Access to foreign government bonds denominated in local currencies, reducing reliance on U.S. dollar–only fixed income.
  • The capability to transition into physical gold, including secure storage solutions and personal delivery, for clients who want assets outside the financial system.

This is not about abandoning U.S. markets. It’s about recognizing concentration risk -particularly when debt, deficits, and monetary policy are moving in the same direction.

The Question Every Investor Should Ask

Markets eventually force conversations that investors avoid for too long.

The question isn’t whether the U.S. remains a powerful economy—it does. The question is whether your portfolio is built for a future that looks different from the past.

Does your advisor have a real strategy for:

  • Currency risk?
  • Sovereign debt stress?
  • Inflation and purchasing-power erosion?
  • Capital preservation when correlations rise and diversification fails?

If the answer is simply “buy and hold,” you may be taking more risk than you realize. At Montecito Capital Management, preparation – not prediction – is how we protect wealth when the cycle turns.