Europe's Financial Nuclear Option: How Selling U.S. Bonds Has Become a New Bargaining Chip in Geopolitical Games

The snow in Davos has not yet melted, but an unexpected war of words over the ownership of Greenland has revealed a little-known crack in the global financial order. In January 2025, when Donald Trump half-jokingly revived the possibility of the United States purchasing Greenland, Europe's response went beyond traditional diplomatic rhetoric. George Saravelos, Global Head of Foreign Exchange Research at Deutsche Bank, wrote in a widely circulated analytical note a statement that would later be repeatedly quoted: Europe owns Greenland, but Europe also holds a large amount of U.S. Treasury bonds. This statement, like a stone thrown into a calm lake, sent ripples that quickly spread across global financial markets.

Within just a few days, from Copenhagen to Stockholm, several European pension funds announced reductions or plans to sell their holdings of U.S. Treasury bonds. Denmark's AkademikerPension fund liquidated U.S. Treasury positions worth approximately $100 million; Alecta, one of Sweden's largest pension funds, sold off the majority of its U.S. bond holdings; the Dutch civil servants' pension fund ABP, managing 538 billion euros, saw its U.S. bond holdings drop remarkably by about 10 billion euros between March and September 2025, from 29 billion euros to 19 billion euros. These seemingly isolated financial decisions, when interpreted within a specific political context, point to a possibility: Is Europe transforming its U.S. Treasury holdings from mere financial assets into potential leverage for geopolitical maneuvering?

U.S. Treasury Bonds: The Cornerstone of American Power and Its Achilles' Heel

To understand the deeper implications of this turmoil, one must first recognize the central role of U.S. Treasury bonds in the global financial system. Essentially, U.S. Treasury bonds are government IOUs issued by the U.S. Department of the Treasury, representing the largest and most liquid sovereign debt market in the world. They are regarded by central banks, financial institutions, pension funds, and even individual investors as the ultimate safe-haven assets, serving as the ballast of the international financial system. However, behind this status lies an increasingly massive reliance on debt.

As of early 2025, the total federal debt of the United States has climbed to approximately 38.4 trillion dollars, equivalent to 125% of its gross domestic product. More critically, about 26% of this debt is set to mature within the next twelve months and will require refinancing at higher interest rates. The U.S. Treasury's annual interest payments alone are approaching the 1 trillion dollar threshold, with their share of total federal spending soaring from a mere 3% in 2021 to 15%. This figure outlines a clear reality: the operation of the U.S. government is highly dependent on the willingness of global investors to continuously fund its debt.

Foreign investors hold approximately one-third of the outstanding U.S. Treasury bonds. Japan leads with holdings exceeding $1 trillion, followed closely by the United Kingdom and China. Europe as a whole plays a particularly prominent role. According to estimates by Deutsche Bank, the total value of U.S. financial assets (including Treasury bonds and stocks) held by European investors amounts to about $8 trillion, nearly double the sum of the rest of the world combined. Countries such as Belgium, France, and Switzerland are all significant holders of U.S. Treasury bonds. This deep interconnection not only grants European investors substantial market influence but also exposes a structural vulnerability in the U.S. economy: its fiscal sustainability is closely tied to the continuous inflow of foreign capital.

The Transmission Mechanism of "Sell-off Threats": From Market Signals to Political Pressure

The threat of European investors selling off U.S. Treasury bonds does not necessarily derive its power from large-scale, coordinated selling actions themselves—such actions would also inflict significant losses on the sellers. The true potential for weaponization lies in the market psychology and price transmission mechanisms that this threat can trigger.

The financial market is a game of expectations. When market participants begin to seriously consider the possibility that European officials or large institutional investors may reduce their holdings of U.S. Treasuries, this expectation itself influences prices. The transmission chain is clear and swift: increased selling expectations → falling prices in the U.S. Treasury market → rising bond yields (which move inversely to prices) → higher financing costs for new U.S. government debt issuance, increased interest burden on existing debt → tightening of domestic credit conditions in the U.S. (such as mortgage rates) → increased pressure on economic growth.

Market dynamics in late January 2025 provided a vivid footnote to this mechanism. At the height of the Greenland controversy and discussions about selling off, the yield on the 10-year U.S. Treasury note once climbed to 4.30%, hitting a four-month high. The U.S. dollar also weakened correspondingly against the euro. Such market volatility directly touched on the core concerns of the Trump administration. During his campaign and tenure, Trump repeatedly promised to lower interest rates to maintain economic prosperity and asset prices. The rise in yields ran counter to this goal.

The market has already demonstrated its power. Looking back at the so-called Liberation Day in 2024, when Trump announced the imposition of broad tariffs on a series of trading partners, financial markets responded by selling off U.S. assets, with U.S. Treasury bonds being sold off and yields soaring. Several days later, the Trump administration announced a 90-day tariff truce. Many analysts believe that the sharp reaction from the financial markets prompted that policy reversal. History seems to have repeated itself in early 2025: when Trump announced at Davos that he would rule out the use of force against Greenland and temporarily suspend tariff threats against several European countries, U.S. Treasury yields fell in response. This close temporal correlation is difficult to explain as mere coincidence.

U.S. Treasury Secretary Scott Bessent hurriedly stepped in to douse the flames, stating that the idea of Europe launching financial retaliation lacked logic and downplaying the impact of the Danish fund's sell-off. However, the Treasury Secretary's swift response precisely illustrates how sensitive the White House is to this matter. A government that operates on debt cannot afford the risk of uncontrollable long-term financing cost increases.

Europe's Dilemma: The Deterrent Power and Self-Destructive Risks of Nuclear Weapons

Using U.S. Treasury holdings as a geopolitical lever is a double-edged sword for Europe, and its application faces multiple complex constraints.

First is the coordination challenge. Europe is not a single financial decision-making entity. The European Central Bank, national central banks, commercial banks, and thousands of private institutional investors (such as pension funds, insurance companies) each have independent balance sheets and investment strategies. EU political institutions cannot order private institutions to sell specific assets. In theory, regulators could indirectly influence the attractiveness of banks holding US Treasury bonds by adjusting risk weights and other methods, but this process is complex and slow. What could truly be influential is more likely the formation of market consensus rather than administrative orders.

Secondly, the risk of self-harm. European investors hold trillions of dollars worth of U.S. assets, and their own wealth is closely tied to the value of these assets. Initiating a coordinated sell-off of U.S. Treasury bonds would be akin to actively detonating a financial bomb they themselves hold. A sharp plunge in U.S. bond prices would directly cause European investors to suffer massive paper losses, potentially triggering their own financial crises. Furthermore, the U.S. Treasury market serves as the cornerstone of the global financial system; its severe turbulence could trigger widespread liquidity crises and a global recession, from which the European economy would hardly remain unscathed. As one analyst put it: Those holding so many bonds are the last to want to see bond prices plummet.

Furthermore, there is the threat of retaliation from the United States. In an interview with Fox Business, Trump issued a clear warning: if Europe sells off U.S. assets, the United States will implement large-scale retaliation, claiming that we hold all the good cards. Although the specific means of retaliation remain unclear, the U.S. possesses a wide range of sanctions tools in areas such as trade, finance, and technology. A financial confrontation could quickly escalate into a full-scale economic conflict, the consequences of which are difficult to predict.

Therefore, for European policymakers, the greatest value of the option to sell off U.S. Treasury bonds may not lie in its actual execution, but in its existence as a credible deterrent. It sends a clear signal to Washington: unilateral actions by the United States could undermine the financial foundations upon which its hegemony relies. The effectiveness of this deterrent is precisely built on the premise that using it would cause disaster for both sides—much like the logic of nuclear deterrence.

Structural Shift: De-risking and the Erosion of Trust in the U.S. Dollar

Setting aside short-term geopolitical maneuvering, the recent actions of European pension funds may reveal a deeper, more enduring trend: global institutional investors are reassessing the long-term risks of U.S. assets, particularly U.S. Treasury bonds.

When explaining the reasons for the sell-off, multiple funds coincidentally pointed to the United States' poor fiscal conditions and rising political risks. Anders Schelde, the investment director of Denmark's AkademikerPension fund, straightforwardly stated that the decision was based on the weak fiscal position of the U.S. government. Sweden's Alecta fund attributed the move to the increased risks resulting from unpredictable U.S. policies under President Trump's leadership. Although the Dutch ABP fund did not explicitly attribute its actions to Trump's policies, its shift in asset allocation—reducing U.S. Treasury holdings while redirecting funds to Dutch and German government bonds—signifies a meaningful move toward de-dollarization and increased Europeanization.

Pim Zomerdijk of investment advisory firm Sprenkels pointed out: Trump's unpredictability, along with broader and rising geopolitical uncertainties, is leading pension funds to scrutinize their financial and non-financial resilience more critically than ever before. This resilience assessment goes beyond traditional credit and interest rate risks, incorporating non-traditional risk factors such as geopolitical and policy stability.

This points to a potential structural shift: the political risk premium embedded in U.S. assets, particularly its Treasury bonds, is systematically rising. For decades, the U.S. dollar and Treasury bonds were regarded as risk-free assets, a status that underpinned America's exorbitant privilege. However, mounting debt, domestic political polarization, and a foreign policy that frequently weaponizes economic tools are eroding this trust. China's reduction of its U.S. Treasury holdings by roughly half over the past decade, from about 1.3 trillion dollars, was a precursor to this trend. Now, European investors also appear to be embarking on a similar, albeit more cautious, de-risking adjustment.

This adjustment may not necessarily be a storm-like sell-off, but is more likely to manifest as a slowdown in holdings, shorter durations, or demands for higher yield compensation. However, even a trickle of water can reshape the landscape. If foreign investors' marginal demand for U.S. Treasury bonds continues to weaken, the U.S. Treasury will have to rely more heavily on domestic buyers (such as the Federal Reserve) to absorb its massive debt issuance. This could lead to complications in monetary policy or upward pressure on long-term interest rates. The Trump administration, on one hand, has pledged to significantly increase defense spending (planning to raise the defense budget to 1.5 trillion dollars by 2027), and on the other hand, has called on the Federal Reserve to cut interest rates to reduce financing costs. The inherent contradiction between these two goals will become more acute against the backdrop of a potential slowdown in foreign capital inflows.

Conclusion: The Deterrence Game in the Era of Financial Interdependence

The Greenland incident is gradually subsiding, but the discussions it sparked about the weaponization of finance have opened a window into understanding great-power competition in the new era. It reveals a core paradox: the deep financial interdependence formed in the era of globalization, while creating common interests, also breeds mutual vulnerability, and this vulnerability itself can be transformed into political power.

European investors considering selling U.S. bonds is essentially a nascent form of a mutual assured economic destruction strategy. It is unlikely to manifest as a coordinated financial blitzkrieg, which would be tantamount to suicide for the initiators. However, as a looming threat, it has already demonstrated its influence. By shaping market expectations, it compels Washington to factor in the cost of its own financial stability when formulating aggressive unilateral policies.

From a broader perspective, this turmoil is a sign of subtle cracks appearing in the cornerstone of America's global hegemony. The dominance of the U.S. dollar and U.S. Treasury bonds is not only built upon economic scale and market depth but also, more importantly, upon global trust in the stability of its institutions, the predictability of its policies, and the reliability of its legal system. When such trust is eroded by domestic political strife, unsustainable debt, and erratic foreign policies, the foundation of hegemony begins to loosen.

The adjustment of asset allocation by European pension funds may only be the beginning of a prolonged global capital rebalancing process. In the future, geopolitical risks will be more deeply integrated into global asset pricing models. For the United States, the greatest challenge may not come from a specific external threat, but rather from how to manage its own expanding debt and political risks to maintain long-term global confidence in its financial system. For Europe and other regions of the world, while benefiting from the convenience of the dollar system, reducing excessive reliance on it and building a more resilient financial architecture will become an increasingly urgent strategic task.

The clamor of Davos will eventually fade away, but the price fluctuations recorded by the market and the changes in the asset portfolios of institutional investors will become silent footnotes to the power shifts of this era. In the international relations of the 21st century, the government bond yield curve, much like aircraft carriers, can serve as a tool for projecting power—only its operational logic is more concealed and profound.