The vice tightens on rates
Since the bombshell announcements of “Liberation Day”, most major asset classes have recouped the drastic falls of early April. All except two: the dollar and US long rates. This reflects mistrust of the dollar on the one hand and worries about the sustainability of US debt on the other. The dollar has suffered a clear depreciation against both the euro and a basket of US trade-weighted currencies. Meanwhile, US 30-year yields are approaching the symbolic threshold of 5%, and it may have been the prospect of breaching this threshold that provoked Trump’s about-turn with the opening of a truce.
On financial markets, the major trends have been driven by the shifting narrative, from US exceptionalism at the end of 2024 to the trade war in 2025. The sustainability of US debt may be the driver for the future.
Between 2022 and 2024, there was an annual public deficit of over 6% of GDP and strong growth of 2.7% – US growth seems to have been boosted by the public deficit, like a cyclist in the doping scandal at the end of the nineties. Another challenge is looming, as the interest burden continues to mount – from an average of 1.5% for two decades, it has risen since the post-COVID inflation shock to reach over 3% of GDP today.
Congress is currently negotiating the outline of the 2026 budget, baptised the “Big, Beautiful Bill” by Donald Trump. On the expenditure side, the trend is to paring down: whilst the sovereign functions – defence, police and justice – are being cossetted, the social security umbrella is in for meagre times. On the income side, things are less clear. Taxes and duties on households and companies will be cut in the hope that this can be financed by the rise in trade tariffs. But this equation looks hard to balance. The level of income from trade tariffs was at a record high in April but it is far from the expected level of tax cuts.
In addition, receipts are closely linked to the strength of economic growth since they move in line with profits, earnings and consumption. Whilst a recession in 2025 is now looking less likely, a slowdown is much more probable, which will be another burden for tax inflows.
With total debt at close to 100% of GDP, a high structural deficit that could deteriorate a little further, the risk of the proposed “Big, Beautiful Bill” turning into a big, beautiful invoice cannot be ruled out, tightening the vice on rates a little more and imposing stricter management on the Federal government.
Final version of 16 May 2025 │ Clément Inbona, Fund Manager, La Financière de l’Échiquier (LFDE)