Macro
This week, the U.S. House of Representatives narrowly passed Trump’s tax and spending proposal, which increases the debt ceiling by USD 4 trillion and is projected to add between USD 3.8 trillion and USD 4.7 trillion to the national debt over the next decade. There is no appetite to touch Medicare and Medicaid, and the most controversial items in the budget remain Trump’s old and new tax cuts. The anti-tax view is not solely a Republican position. Polls show that over 70% of Democrats agree that cutting spending is better than raising taxes. Trump’s spending cuts are still historic. Combined DOGE cuts and energy credits will amount to at least USD 1.6 over 10 years or 2% of annual spending. Expected budget deficit should go from 6.4% of GDP last year to 6.1% this year.
Observers agree that it is politically suicidal to cut spending by enough to bring the budget into balance. In a notable policy shift, U.S. Treasury Secretary Scott Bessent signalled that the government is no longer focused on cutting spending to address the growing deficit. Instead, the new strategy under the Trump 2.0 administration is to “grow our way out” of debt—by ensuring GDP growth outpaces nominal interest rates. Bessent emphasised that boosting economic growth is now the primary tool for stabilising public finances, implicitly acknowledging that austerity is politically unviable.
This pivot suggests a likely return to expansionary fiscal and monetary policies, raising the chances of further money printing. Investors should position themselves accordingly, favouring resilient, high-quality companies with pricing power, sustainable margins, and store-of-value assets that can endure long-term currency debasement.
This increased deficit should be partially offset by an additional USD 2 trillion in revenue from tariffs (based on the current estimate, which will change a lot as the trade negotiations continue). Under the Trump tariffs, revenues grew from USD 38 billion to 85 billion. This remains mostly unchanged under Biden, bringing the total tax revenue from 1.2% to 1.8% of federal total revenue between 2015 and 2024. The biggest increase in tariffs, however, started this year and, as proposed today, brings the effective US tariff rate to 16.4% from 1.5% in 2015. There is pushback from the Republican Party to permanently add them to the legislation and tax code. Instead, they remain an executive order that future presidents can revoke at will.
Rates
This week brought renewed attention to the U.S. Treasury market, where demand experienced a sharp decline. The 30Y Treasury yield spiked above 5%, reaching its highest level in nearly two decades. The 10y and 30Y are 47 and 55 basis points above their recent trough on 14/04/2025. While fiscal bills push yields temporarily higher, and could spike further in the next month or two, a slower economy and higher unemployment should at some point bring them lower, creating an opportunity to lock in higher rates.
Investors are increasingly concerned about the widening fiscal deficit, the growing interest burden, and the accelerating pace of U.S. borrowing. If politicians fail to reduce the deficit further, the rates market may compel them to revise the budget. Broadly, there are three main reasons why U.S. Treasury investors are seeking higher yields for long-dated debt:
- Debt Servicing Costs Have Surged
Investors are increasingly concerned about the widening U.S. fiscal deficit, rising interest burden, and the accelerating pace of government borrowing. As a result, they are demanding higher yields to hold long-dated U.S. debt. Interest payments on the national debt have now exceeded $1 trillion, surpassing both defence and Medicare spending. This highlights mounting fiscal stress and the growing risk of crowding out, where debt servicing costs reduce the government’s capacity for discretionary spending.
- Loss of the AAA Seal of Safety
All three major credit rating agencies (Moody’s, S&P, and Fitch) have removed the U.S.’s AAA rating, signalling increased sovereign risk and weakening the perception of Treasuries as “risk-free.”
- Policy uncertainty
Uncertainty is stemming from both the Federal Reserve and the Federal Government. The FED uncertainty centres around the timing and magnitude of future rate cuts. Their latest guidance and cautious tone emphasise data dependence, which leaves markets constantly repricing expectations. A lack of clarity combined with the risk of a policy misstep keeps volatility elevated, especially in the belly of the curve (5Y to 10Y). We are also going to have a new chairman in less than one year. On the fiscal side, we have disruption in a decade-long global trade status quo, a lack of a credible long-term deficit reduction plan, and the political gridlock surrounding budget negotiations.
Similar demand decline is seen in Japanese bond market. We also had a weakest JGBs demand since 1987 (second year of the Japanese asset price bubble: land values in Tokyo rose more than 85 percent between July 1986 and July 1987). BoJ is still responsible for half of the bond purchases but it plans to scale it back (their target is to reduce monthly purchases to JPY 2.9 Trillion by Q2 2026), and traditional buyers are not stepping in while the inflation accelerates. Interestingly we are seeing demand from the international buyers. Curves in developed markets where steepening since March but JGBs curve in particular. The 10/30 JGBs spread increased 10 bps last week and is now nearly 160 bps compared to 50 bps 10/30 UST spread. Inflation remains sticky, and accelerated in March to 3.2%, well above the BoJ’s inflation target remains at 2%. There is also expected decline in export due to tariffs with some US orders on Japanese cars already being cancelled.
With the exeption of Japan, central banks are in the process of cutting interest rates. Traditional economic drivers support falling yields, however they’ve been recently rising driven by the US deficit as well as recent pop up in inflation in other developed countries. Futhermore US efforts to re-balacne the global trade are inflationary and should push central banks to keep rates higher for longer in order to hit their inflation target.
Equities
While recent concerns over U.S. fiscal sustainability have prompted investors to shift capital toward Europe, history suggests that abandoning U.S. markets too hastily may be short-sighted—especially for growth-focused investors. Over the past five decades, the U.S. has consistently outperformed in innovation and company creation, producing 241 companies worth over $10 billion, compared to just 14 in Europe. American public markets are also home to younger, faster-growing firms, with top companies typically founded in the 1980s, whereas Europe’s are largely legacy businesses dating back to the early 20th century. Moreover, U.S. venture capital investment remains significantly deeper, fueling a more dynamic tech ecosystem. While short-term macro pressures are valid, the long-term structural edge still leans heavily in favor of U.S. equity markets for those seeking growth.