Week 21 (May 19-May 25, 2025)
Last Wednesday, the bond market sent shockwaves through Wall Street as a lackluster 20-year Treasury auction exposed deep investor unease over America’s swelling deficit and fiscal direction. Demand for the bonds fell short, forcing the government to offer its highest yields in years just to attract buyers—a clear sign that investors are demanding a bigger premium to lend to Washington. This triggered a dramatic surge in Treasury yields, with the 30-year rate vaulting above 5% and the 10-year yield climbing to levels not seen since last year. The fallout was immediate: stocks tumbled, the Dow plunged over 800 points, and nervous investors began to question the once-unshakeable status of U.S. assets.
In essence, last Wednesday’s bond market upheaval sent a clear and undeniable message to policymakers—and everyone else—that the rising cost of America’s debt can no longer be overlooked.
Another headline-grabbing moment on Capitol Hill was the razor-thin House vote on President Donald Trump’s sweeping tax and spending package—dubbed the “One Big Beautiful Bill.” After a dramatic all-night session and intense last-minute negotiations, lawmakers approved the massive legislation by just a single vote, setting the stage for a seismic shift in U.S. economic policy. The bill, which promises to lock in Trump-era tax cuts, slash safety net programs, and ramp up spending on border security and defense, now heads to the Senate, where the next round of political fireworks is sure to follow.
As markets were still absorbing Moody’s downgrade, mixed economic data, and fresh headlines about the tax bill, President Donald Trump jolted investors again Friday morning by announcing a sweeping 50% tariff on all imports from the European Union, set to take effect June 1. He framed the move as retaliation for stalled trade talks and what he described as the EU’s tough trade barriers.
After sending markets into a tailspin last week with his June 1 deadline, Trump abruptly shifted gears on Sunday, agreeing to von der Leyen’s request for more time and pushing the tariff showdown to July 9. The move injected fresh momentum into transatlantic trade talks and sent European markets soaring, but with the new deadline looming, the suspense is far from over.
Big picture: This unpredictability weighs heavily on investment and spending, especially for small businesses that lack the exemptions larger firms can secure. Coupled with federal layoffs and disrupted supply chains, consumer and business confidence have dropped to recessionary levels. Meanwhile, rising concerns among bond investors—so-called "bond vigilantes"—are pushing up borrowing costs, signaling growing doubts about economic policy sustainability.
We’re bracing for a pronounced economic slowdown, but we don’t see a full-blown recession on the horizon just yet. If a downturn does hit, policymakers will be short on fiscal firepower to cushion the blow.
While both we and the broader consensus have stepped back from calling a full-scale recession, we’re still keeping a close eye on a “growth recession”—that tricky middle ground where the economy limps forward but fails to deliver real momentum. In the early stages, expect this sluggish growth to be paired with a dose of stagflation: slow expansion mixed with stubborn inflation, making for a challenging economic cocktail.
As for the stock market, we’re skeptical it will reach new highs until investor nerves settle—and if it does, any rally would likely be on shaky ground.
We still anticipate a retest of April’s lows, but that scenario probably requires either a sharper slowdown or another bout of inflation first.
The bond market is sending a clear signal of discontent with current fiscal policy, raising questions about just how far this standoff might go. Chairman Powell appears determined to resist outright monetization of the deficit in the style of Japan, though the possibility of yield curve control remains on the table. Should President Trump appoint a more inflation-tolerant Federal Reserve Chair next year, the bond market could face severe turbulence, potentially triggering a collapse in confidence.
At present, it seems unlikely that the administration will take meaningful steps to rein in the fiscal bubble unless external pressures force their hand. Without intervention from the Senate, the fiscal deficit appears poised to remain unchecked.
Fiscal negligence, unfortunately, is a bipartisan issue—helping to explain the remarkable strength of alternative assets like gold and Bitcoin as investors seek safe havens in an era of mounting uncertainty.
Despite ongoing market turbulence, policy uncertainty, and escalating trade tensions, the U.S. remains the world’s largest and most advanced economy, but its position is facing new challenges.
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