Update #1: As of 11:15 PM EDT, the 10 year yield has climbed over 4.5%, and the 30 year yield is now hovering right below 5%. These are significant thresholds the market looks at right now to gauge bond market stress. Off-hours trading can be a crapshoot, and much can change by US markets opening. But if this continues, pressure on stocks will be significant, and this story will capture the Monday news cycle.
For weeks, a “relief rally” on Wall Street, fueled by a “deal” to agree to future parameters on how to negotiate a deal between the U.S. and China (or some such) lifted the major stock indexes back to levels seen before the now infamous “Liberation Day” gutted 401(k)’s and corporate valuations. It was, of course, irrational exuberance on the part of mainly pro-Trump “retail investors” eager to relive the days of easy money in the markets, fueled primarily by Biden-era post-COVID soft landing measures that pushed markets steadily in one direction….up.
But this week, the con game being perpetuated on American investors and voters is likely to run out of room to bury the lede, and the con — that deficit juicing tax cuts to the wealthy and corporations can be pushed through by Republicans without significant damage to the U.S. economy and critical services paid for by the government — can no longer be driven by an empty, self-aggrandizing narrative from the Oval Office.
On Friday, one of the most significant developments to date in DonOld Trump’s Presidency of Lies attracted little attention, but may result in the most consequential, and uncontrollable, chain of events this Administration will face. It was after market close on Friday that Moody’s, one of the three major investment grading houses for Treasuries, lowered the credit rating for US Treasuries from the top AAA rating to AA-1.
Though the downgrade captured little mainstream attention buried in the Friday PM news dump, institutional investors and market analysts scrambled to assess the impact of the move. In downgrading the quality of U.S. debt on Friday, Moody’s became the last of the three major agencies to strip the U.S. of it’s once-pristine debtor rating, a scenario not seen in the U.S. in over 100 years.
According to Moody’s:
Over more than a decade, US federal debt has risen sharply due to continuous fiscal deficits. During that time, federal spending has increased while tax cuts have reduced government revenues. As deficits and debt have grown, and interest rates have risen, interest payments on government debt have increased markedly.
Without adjustments to taxation and spending, we expect budget flexibility to remain limited, with mandatory spending, including interest expense, projected to rise to around 78% of total spending by 2035 from about 73% in 2024. If the 2017 Tax Cuts and Jobs Act is extended, which is our base case, it will add around $4 trillion to the federal fiscal primary (excluding interest payments) deficit over the next decade.
As a result, we expect federal deficits to widen, reaching nearly 9% of GDP by 2035, up from 6.4% in 2024, driven mainly by increased interest payments on debt, rising entitlement spending, and relatively low revenue generation. We anticipate that the federal debt burden will rise to about 134% of GDP by 2035, compared to 98% in 2024.
In other words, no amount of phony DOGE cuts or “work requirements and revised eligibility standards” (e.g.: massive cuts to Medicaid) will offset the estimated $4 trillion of deficit growth caused by the Republicans’ A #1 goal of extending the tax cuts of 2017. Simply put, the bond markets aren’t having it.
Why does this matter?
— with the downgrade, and the rationale behind it, those in the know on Wall Street and in the global bond markets cannot support the now “too late” (see what I did there) effort by the GOP to ram through trillions in tax cuts that will explode the US deficit. Moody’s has now formally put traders on notice that exploding the deficit by $4 trillion better come with some pretty big revenue producing promise on the back-end of that spending. In other words, higher taxes or substantially increased investments by U.S. and global businesses. Not by billionaires stuffing millions more into their and their families’ pockets
— with the downgrade, an already pressured bond market is already seeing pre-Monday yield spikes in both the bellweather 10-year and 30-year US notes, the latter threatening to break through price lows not seen since the early 2000’s, shortly before the housing bubble burst
— if bond markets falter, the faux equities rallies of the past month will likely follow, and potentially crater faster, as nervous investors become aware that Trump’s “big beautiful bill” is likely only coming at the significant cost of faith in US Treasuries, many of which are held by foreign governments who cannot be controlled to hang on to them by Trump and Treasury Secretary Scott Bessent. In other words, the GOP led by Trump has now backed itself into a corner where passage of an extension of 2017 Tax Cuts cannot simply be falsely painted as a “big win” for the Administration and the GOP on Fox News. It is now a lose-lose proposition.
— should bond yields spike, as expected, U.S. corporations will face sharply increased borrowing costs (as will we, of course) that will almost certainly put a hold on all sorts of decisions to open the spigots on capital spending and new ventures — including the long promised “return to America” of billions in manufacturing, assembly and inventories of supplies. Again, the big, beautiful lie pushed by Trump is meeting a dead end in the maze of market reality.
— should the bond market become the major problem it looks to be, all eyes will turn to the Fed, where pressure may mount for the Fed to process emergency rate cuts to prevent a market catastrophe for U.S. corporations now frozen between increased costs to borrow and invest, and increased costs of doing business driven by the Trump tariffs. Problem is, in that scenario, a drop in Fed rates to stimulate growth and spending actually serves as the tool that typically drives prices higher, something already brewing as Wal-Mart and thousands of other retailers begin to pass through the tariffs already in place. With no “new deals” in the offing under current circumstances, the Administration will be stuck — and once again, as happened in mid-April, will be left with no choice but to back down further on existing tariff rates. Expect that to happen in the next several weeks, under the cloak of “mystery agreements” to a series of tariff “letters” being sent out this week in lieu of the promised “endless line of meetings” waiting to secure 90 deals in 90 days. All pure bullsh%t. But lying about deals that reduce tariffs will be the Trump gang’s only recourse left to stave off a financial meltdown, fueled by chaos in the markets, and lie he will do. Problem is — it takes two to tango, and as noted before, China, Japan, Saudi Arabia (less likely) and other major holders of US bonds could just say “enough of this BS” and begin shifting treasury holding to markets perceived to be more trustworthy, forthcoming and sincere in standing behind its debts.
— finally, should the gang that couldn’t walk straight not engineer a face-saving ruse to peddle phony trade deals in the name of tariff reversals in such a way that satisfies the markets, and should Congress be frozen by the new reality that they must act independently, and potentially in spite of, Trump’s “leadership”, the entirety of the U.S. debt system would be at risk. With an impending debt-ceiling debate on the near horizon, and a clear lack of any sort of conformity between the number of competing factions of Congress (especially in the GOP House), there is a real possibility that for the first time in modern history, the U.S. could be considered a risk to, and could actually, default on its debt promises, initiating a death spiral in bond markets that would force the U.S. economy to the brink.
Those who know Trump know that he is the master of the con, a grifter with no acumen to handle the mess he’s put into motion. The reason we now are beginning to hear rejection of Trump’s actions from some within the GOP ranks is that they know that the con is teetering on failure, a failure that Trump is no longer able to control with fancy words, empty promises and endless mistakes. The markets aren’t buying it, and beginning tomorrow, we will begin to see how quickly the process of unraveling the great con of the 2024 election begins. By all indications, it promises to be fast, and significant.
