May 24, 2025
The proof is undeniable—the Trump presidency is off to a disastrous start. Inbound tourism has fallen sharply. Retail purchases of US goods are being boycotted in multiple countries. International trade and military agreements that deliberately exclude America are accumulating. In this week’s Navigator Report #20, I show that US stocks and bonds are underperforming significantly, as international investors began selling immediately after election day on November 5 and escalated their withdrawals on Inauguration Day, January 20.
On April 2, Trump called ‘Liberation Day’, foreign sales surged, intensifying on April 9 when Trump raised tariffs on China to 145%. By the end of this week, he announced plans to impose a 50% tariff on all EU imports starting next week, on June 1. If he intended to weaken America, he could hardly be doing a more effective job.
A week ago, Moody’s lowered its rating on US debt. Further evidence of market instability emerged this week: the US 10-year yield increased by over 1.6%, while the US dollar dropped by 2.0%. Meanwhile, the Japanese yen, Swiss franc, British pound, euro, and Canadian dollar strengthened by +2.2%, +2.1%, +2.0%, +1.8%, and +1.8%, respectively. Their stock markets, in turn, either gained or experienced only minor losses compared to US markets, reinforcing the notion that international investors are offloading US Treasuries and equities.
Trump’s Shift from Spending Cuts to Tax Cuts is Creating a Treasury Market Crisis
The Trump administration’s pivot from government spending cuts via DOGE to aggressive corporate tax reductions in the new budget bill this week is triggering serious convulsions in the US Treasury market—and the implications could be far more severe than many investors realize.
The Market Warning Signs
The crisis began materializing when the US Treasury attracted tepid demand for a $16 billion sale of 20-year bonds on Wednesday. This weak auction pushed 30-year Treasury yields to an 18-month high above 5%, where they remained through Thursday. The 10-year Treasury yield moved to 5.615% before pulling back a little.
“The move reflects a change in perceptions around the safe-haven value of holding long-dated US paper,” explained Joseph Brusuelas, US chief economist at RSM. “Investors are growing increasingly concerned about the intersection of government spending, taxes, trade, inflation and growth.”
The risk premium for locking up money for 10 to 20 years has dramatically increased as uncertainty about America’s fiscal trajectory grows.
A Global Contagion
The problem is no longer confined to US markets. It’s had an immediate impact on the UK and Japanese bond markets. Japan’s auction of 20-year notes attracted the weakest demand in over a decade, pushing the country’s 30-year yield to the highest level since records began in 1999.
This global shift in long-dated bond yields is particularly dangerous because it threatens a critical funding mechanism for US debt. If, for example, Japanese institutional investors—major holders of US Treasuries—are incentivized to repatriate funds to buy higher-yielding Japanese bonds, the US Treasury would be forced to offer even higher yields to attract buyers.
With the US Treasury carrying $36 trillion in debt, rising borrowing costs create a vicious cycle of ever-increasing debt service payments.
The Fiscal Reality
Trump’s tax-cutting agenda has staggering costs. The Republican-controlled House passed his revised tax bill by just one vote (215-214), extending $4.5 trillion in tax breaks from his first term. The Committee for a Responsible Federal Budget estimates the cost at $3.1 trillion over the next decade, roughly 10% of current GDP.
The nonpartisan Congressional Budget Office now projects deficits near 7% of GDP in the coming years. As Stefan Koopman of Rabobank puts it: “That’s wartime borrowing in a peacetime economy with low unemployment.”
The Dangerous Shift in Focus
The most concerning aspect is how quickly priorities changed. Early this year, the focus was on Elon Musk’s DOGE initiative and cutting the deficit to 3% of GDP through government spending reductions. One analyst noted, “This has massively moved to the back seat. It is all about corporate tax cuts.”
This represents exactly the wrong medicine for an overleveraged government. “The last thing a long-dated bond needs is tax cuts,” warns one market observer. “We need higher revenue, not more fiscal easing.”
Market Vulnerability
While Trump showed some responsiveness to market signals earlier—suspending certain tariffs after facing market upheaval—the current situation is more dangerous. Stock markets have recovered their losses since April, giving policymakers false confidence.
Investors know that the strength of the US financial market is its bond market and credit system. Bond market distress typically precedes equity market corrections. The risk is that by the time stocks force policy changes, Treasury market damage could be irreversible, creating a “violent bond market sell-off at the long end” that ultimately feeds into all risk assets.
The Bottom Line
Investors, whose primary job is risk management, never ignore Treasury market warning signs. Markets are finally recognizing that America’s fiscal outlook is “completely unhinged,” with no serious effort at consolidation. The shift from spending discipline to tax cuts at the wrong moment destabilizes the Treasury market. It threatens to trigger a funding crisis for the US, the world’s largest debtor. A funding crisis would likely lead to a major bear market in equities.