Oxymoron

The action continues to be in the bond market. While UK Long term Gilts and JGBs are hitting new highs in yields, the Treasury auctioned yestearday 20 year bonds, and they end up paying above 5%, which means investors are demanding more return to lend money to the US. So much so that, as you can see in the chart below, the CDS market is now discounting a six notch downgrade to BBB+ for US debt from its current AA+ (S&P rating scale). Although it may seem exaggerated, and it can change tomorrow in the other siredtion, it is true that the U.S. needs to do something radical soon to avert a fiscal calamity, as this things compound and accelerate quickly. Meanwhile, The Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) estimate the OBB bill increases deficits by $3.8–$5.3 trillion through 2034, depending on whether temporary provisions are extended permanently. And the way the Trump administration intends to offset that deficit increase is through tariffs ($3.8Tn) which seems to imply no successful negotiations with China in the short term. We are trapped in an oxymoron scenario: successful negotiations with China will eliminate tariffs, and will rebalance both economies to allow for U.S. manufacturing, but those tariffs, that will be eliminated, will offset the deficit increase caused by lowering taxes. In the end, the most likely scenario is that they will tap the Fed to lower rates and buy bonds, which will weaken the dollar, to make American goods competitive again.

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