Global financial markets are once again being buffeted by a wave of uncertainty as investors begin to reassess the fiscal risks that are increasingly weighing on the world’s largest economy, the United States (US).
US stocks fell sharply, the credit gap widened, while Treasury yields soared, signaling deep concerns over Washington’s latest fiscal plan that could further complicate the country’s already fragile budget situation.
‘Sell America’ Narrative Reemerges
The US dollar, which is usually considered a safe haven, is behaving differently, more like a risk asset in the current climate.
With US bond yields continuing to rise and confidence in US fiscal discipline waning, investors are increasingly distancing themselves from dollar-denominated assets, rekindling the so-called “Sell America” trading wave.
The main concern at the moment is the renewed pressure on the trajectory of the US national debt.
The Republican leadership in the House of Representatives has submitted an amended version of President Donald Trump’s proposed massive tax and spending package.
Among its highlights is an increase in the state and local tax deduction (SALT) cap, which is intended to consolidate support among the divided Republican party.
But for bond investors, the message is clear: the bill will only add to the deficit burden.
Earlier this week, Moody’s Ratings downgraded the US credit rating to below AAA, warning of long-term risks to the nation’s debt sustainability.
Now, many traders are positioning for the possibility that long-term US bond yields will continue to rise, driven by expectations that demand for US government bonds will decline if fiscal consolidation measures fail to materialize.
Warning Signal From Japan: Rising Bond Yields Reflect Global Sensitivity
The fiscal pressures are not limited to the US. Across the Pacific, Japan’s bond market is also giving early warning.
This week’s 20-year government bond auction was met with a lackluster response, sending bond yields soaring sharply. The situation raises questions about the effectiveness of the Bank of Japan’s plan to gradually exit its ultra-loose monetary policy.
This signal sends a clear message to policymakers around the world that any reduction in support for bond markets must be done with caution, or risk triggering sudden price instability.
Rising Japanese bond yields have also prompted investors to reassess the fiscal health of other developed countries, not just the US.
This shift in global bond market dynamics suggests that markets are becoming less tolerant of government spending excesses, and more sensitive to central bank exits.
Currency Markets Struggle in Opposite Directions
In currency markets, the US dollar traded mixed, seen as stable against major European currencies, but weaker against most Asian currencies.
The Japanese yen emerged as the leader among G-10 currencies, as investors returned to taking positions in safe assets.
SARACEN MARKETS View: World Out of Stimulus, Now Entering Adjustment Phase
Global markets are now in a new adjustment phase, as the focus returns to fiscal discipline and the wisdom of central bank monetary policy.
The United States is now in the spotlight, with its rising deficit and political wrangling undermining the credibility of the country’s long-term fiscal stance.
For traders, this is a crucial turning point. Risk assets, particularly those closely linked to the health of the US fiscal stance, long-term bonds and the value of the dollar are now increasingly vulnerable to a major revaluation.
In an environment of renewed uncertainty and increasingly shaky confidence in US policy, early steps in building investment positions with a long-term and cautious view are more important than ever.
