Debt, Trump's tariff policy, etc.: Stocks and bonds caught between euphoria and realism

When US President Donald Trump announced his tariff plans on Liberation Day in early April, it was tantamount to an exogenous shock to the capital markets. Given the resulting significantly increased risk of recession for the world's largest economy, the subsequent more than ten percent correction in leading US stock indices was no surprise – nor was the flight to alternative currencies like the Swiss franc.

What was initially less understandable, however, was that US Treasury bonds were also under considerable pressure. These bonds were considered a reliable safe haven in times of stress. Their yields, measured against long-term bonds, rose by more than 60 basis points within just two days.

Two months later, the stock markets appear unfazed by the tariff skirmish and are poised to reach new all-time highs. However, the bond markets are sending different signals. 30-year US Treasury bonds recently even exceeded the critical 5 percent mark—a level that, apart from the period of hyperinflation in 2023, was last seen at the beginning of the financial crisis in 2007.

Permanent loss of trust

A key factor in this is the fear of unchecked new debt in the United States . If taxes are cut in the United States and tariff revenues are insufficient to fill the resulting gap, the only option left is to resort to further borrowing. The rating agency Moody's shares this view, recently withdrawing its top AAA credit rating from the United States, thus aligning it with its competitor Standard & Poor's.

The International Monetary Fund (IMF) also identified cause for concern, estimating that the debt of nations worldwide will reach nearly 100 percent of global gross domestic product (GDP) by 2030. Many economists believe that the escalating debt, which is largely attributable to the United States and China, poses a threat to global financial stability. Financing the tight budget requires investors who have sufficient funds and are willing to make them available.

While around 95 percent of US debt was still held by domestic investors in 1970, almost a third of US creditors now come from abroad – and the trend is rising. The fact that a significant portion of US assets is held by foreign investors and will increasingly have to be used to finance the budget deficit in the future means that investors must also be kept happy.

However, the confrontational and erratic tariff policy , the USA's no longer first-class credit rating and the weakening of the US dollar, which was at least accepted in order to strengthen the competitiveness of US companies, have the potential to significantly erode the confidence of foreign investors.

Higher term premium due to steeper yield curve

To make matters worse, China, the biggest rival in the trade war, has long held the second-largest holdings of US Treasuries and is increasingly selling them off. The maturity structure of China's holdings also suggests that this shift may not yet be complete – investors in the Middle Kingdom are increasingly holding short-term and therefore particularly liquid US Treasuries.

The rise in the long end of the US yield curve does not, as is often the case, indicate expectations of high future growth. Rather, it suggests that investors increasingly want to be rewarded for the risks involved in assuming long-term US liabilities, through the so-called 'term premium'.

Double burden and concern about the maturity wall

This represents a double burden for the government in Washington. On the one hand, the high level of debt itself is making budget planning more difficult – and on the other, higher interest rates are making new borrowing increasingly expensive. In addition, the so-called maturity wall, the large amount of maturing bonds that need to be refinanced, continues to roll toward Donald Trump's administration.

In 2025 alone, Treasuries worth approximately $9.2 trillion will mature – roughly one-third of the total market. And the air is already thin – since 2024, the White House's interest payments have exceeded annual defense spending. This year, they are actually the second-largest expenditure item in the United States after social spending. Investors will therefore be following with great interest the demand for U.S. Treasuries at auctions.

Mar-al-Lago Accord: more than a concept

In order to meet his country's growing financing needs, which even the controversial DOGE Ministry has so far failed to curb, Donald Trump's cabinet is increasingly reviving unconventional concepts. The idea of ​​issuing particularly long-term Century Bonds is not new, but has once again become the focus of public debate due to statements by Stephen Miran, one of Trump's most important economic advisors. The proposal is also part of even bolder plans for a sustained devaluation of the US dollar, which are being promoted in particular by a small group of US economists.

Proponents of such measures argue that bonds with extremely long maturities and low interest rates, especially with other central banks, could be placed as long-term collateral, significantly reducing the US government's interest burden. Furthermore, the demand effect from lowering interest rates would weaken the US dollar and thus help reduce the trade deficit, which is already a thorn in Trump's side. Many experts and critics, however, view the plans critically. In particular, the implication that the US could use its global leadership as leverage seems strange.

US monetary policy remains wait-and-see

From the perspective of the US Federal Reserve, whose mandate includes not only price stability but also full employment, the situation is anything but straightforward. While current labor market data are still too robust to give rise to fears of a noticeable economic downturn, most households, however, expect a significant increase in prices and may have therefore brought forward their consumption plans. Therefore, a continued continuation of monetary easing by the US Federal Reserve (Fed) is unlikely in the short term – unlike in Europe.

Little scope for adverse developments

The current euphoria in equities stands in stark contrast to the signals from the bond and currency markets. However, the foundation on which the long-standing record run of US equities rested is under threat. This includes, in addition to tax relief, value-enhancing globalization, which is increasingly giving way to protectionism, as well as declining interest rates, which previously translated into higher returns on equity.

Even in a simplified dividend discount model, in which a company's estimated future earnings are discounted to determine its fair share price, higher interest rates have a negative impact. This is compounded by increased refinancing costs for companies and politically induced uncertainty regarding consumption and investment.

This is offset by productivity gains due to rapid developments in artificial intelligence, as well as the technological dominance and innovative strength of the United States. However, current company valuations leave little room for adverse developments and rely heavily on the so-called Trump put, which is intended to calm the capital markets in times of danger. From an investor's perspective, it is therefore worthwhile to look at the bond markets and maintain a balanced portfolio.

About the author:

Michael Hünseler has been Chief Investment Officer (CIO) and a member of the Management Board of LBBW Asset Management since December 2023. His responsibilities include fundamental portfolio management, systematic investment strategies, portfolio management alternatives, and portfolio management operations. Previous senior positions at MEAG, the Unicredit Group, and Deka Investments.