Following on from the first part of our EcoInsight series on US Treasuries, which focused on the US administration's budget plans (US federal debt: the risks of abundance), this second part we are examining how president Trumps’ excesses have harmful effects on the demand for federal paper.The profile of US Federal Government creditors has changed significantly over the past 20 years. The appeal of Treasuries for so-called ‘long-term’ investors (i.e. foreign central banks, resident pension funds and insurers) has waned. More ‘short-term’ investors (i.e. leveraged funds), who favour procyclical strategies, are now very active in this market. This shift has contributed to undermining the safe-haven status of Treasuries, which are now more sensitive to periods of stress
The August Employment Situation featured weak payroll growth and a rise in the unemployment rate. The release confirmed the downside risks surrounding the US labour market. The FOMC is expected to lower the Fed Funds Target Range (-25 bps) for the first time in 2025 at its 16-17 September meeting.
The Genius Act, signed into law on July 18 by President Donald Trump, aims to stimulate stablecoin holdings and demand for T-bills from their issuers. This legislation could ultimately have a significant impact on the scope of monetary policy, banking intermediation, and financial stability. However, the U.S. administration's hope that the increase in net demand for short-term Treasury securities will match that of stablecoins may not entirely come to fruition.
After a long decline of real long-term interest rates in advanced economies, the direction has changed in recent years. The prospect of rising private- and public-sector financing needs is raising concern that this movement is not over. Empirical research shows that the long-run dynamics of long-term interest rates are predominantly driven by economic growth, demographic factors (life expectancy and working-age population growth) and financing needs (public debt and pensions). The first two factors are expected to continue exerting downward pressure, whereas upward pressure should come from the huge financing needs. Empirical estimates of the relationship between long-term interest rates and expected borrowing requirements point towards an impact that should be rather limited, all in all
Broadly speaking, the economic outlook for the global economy at the beginning of September remains largely unchanged from that at the end of July: namely, an economy that, overall, continues to withstand the double blow of US tariffs and uncertainty. Our current scenario expects an average annual growth of 1.6% in the United States in 2025, followed by 1.5% in 2026 and 1.3% in the Eurozone for both years (after 2.8% and 0.8% respectively in 2024). So, while the pace of US growth is expected to remain higher than that of the Eurozone, the outlook is for a slowdown across the Atlantic. On the Eurozone side, however, signs of recovery, albeit tentative, tend to predominate, to the point where the Fed is ready to resume its rate cuts and the ECB is ready to halt them
Considered the safest and most liquid assets in the world, US Treasuries are the first choice of investors seeking security. However, the turmoil that hit their market last April, in the wake of the announcement of new US tariffs, revived memories of the dysfunction caused by the COVID-19 pandemic in March 2020. Despite the magnitude of the shock, the market's loss of liquidity at the time came as a surprise, given Treasuries' safe-haven status. As a matter of fact, more than the shock per se, this fragility is due to structural factors.This first part of our EcoInsight series on Treasuries analyses how the US administration's fiscal plans threaten to exacerbate this fragility
In his much-awaited speech at the annual Jackson Hole central bankers’ symposium, his last as Chair of the Federal Reserve (Fed), Jerome Powell delivered a dovish surprise by opening the door wide to a rate cut at the FOMC’s upcoming meeting, his tone a long way away from his hawkish press conference following the July 30 FOMC meeting, and its hawkish minutes, published just days before the speech. Markets cheered, with both stocks and bonds rallying. Were they right to? Much depends on what caused the shift. Was it relief from inflation developments? Heightened fears of recession? Giving in to political pressure? Chair Powell himself assigned it to a “shifting balance of risks”
The adverse effects of the Trump administration's trade and migration policies on US economic activity are emerging, as they were reflected in the July Employment Situation report and the economy as a whole is exhibiting further signs of a clear loss of momentum. Meanwhile, the trade agreements recently signed should ease the uncertainty shock. Finally, the rebalancing of risks associated with increased fears about employment could challenge the Fed's wait-and-see stance.
GDP growth figures for the first half of the year were clouded by a series of conflicting factors. In Q2, growth in the Eurozone was hit by a decline in exports, while imports in the United States led to a sharp rebound. This is a backlash from Q1, when additional exports, in anticipation of the tariff shock, had supported growth in the Eurozone, while penalising growth in the United States. Beyond this unusual volatility, it is the robustness of growth that is striking. In the Eurozone, German growth was back, although moderately, and monetary policy easing had an impact, with this robustness set to continue in the second half of the year. In the United States, the slowdown remained relative but is likely to strengthen due to the growing impact of tariffs on inflation and consumption.
Presidents Trump and Von der Leyen announced yesterday from Scotland that a trade agreement had been reached. Is it a good deal? Political commentators and many editorialists mostly say no. The stock market reaction says yes. Our take: the deal is at the better end of the spectrum of what could realistically be achieved. Importantly, it removes the risk of a trade war escalation in the world’s largest trade relationship, and creates a more predictable environment for firms on both sides of the Atlantic to operate in.
This time, these are not estimates based on models, but actual data provided by customs authorities. Partially available until the second quarter of 2025 in both China and Germany, they show a dramatic drop in exports to the United States in the wake of the tariffs imposed by the Trump administration, as well as the remarkable ability of international trade to redeploy when it is hindered in one area.
The latest monetary tightening in the United States between March 2022 and July 2023 resulted in much larger outflows of portfolio investments by non-residents than during the previous tightening (2016-2018) and the famous taper tantrum of 2013. However, emerging economies are less vulnerable to monetary tightening across the Atlantic than they were a decade ago. On the one hand, the impact of "flight to quality" capital movements by non-resident private investors on risk premiums and local currency bond yields is less significant. Secondly, the level and structure of corporate debt have improved.
Improvement in the ISM. The manufacturing ISM improved modestly (49.0, +0.5 pp) in June, with a notable jump in output (50.3, +4.9 pp), which entered expansion territory for the first time since February. The non-manufacturing ISM returned to growth territory (50.8, +0.9 pp) thanks to a rebound in activity and new orders. The CEO Economic Outlook declined again in Q2, reaching a five-year low (69.3, -14.7 points). The three components assessed (plans for capital investment, plans for U.S. employment, and expectations for sales) have all fallen.
Donald Trump has, for the most part, taken a wait-and-see approach following his destabilising announcements on trade tariffs. Nevertheless, the damage has been done and uncertainty remains high. Both growth and financing of the US economy could be affected. For the time being, the oil sector appears to be holding up well.
While the Federal Reserve (Fed) estimates that uncertainty has eased, its conviction that a tariff-related rise in inflation is looming has hardened. The Committee (FOMC) nevertheless appears to be greatly divided on the balance of risks. We maintain our forecast that there will be no rate cuts in 2025 in light of renewed inflationary pressures combined with insufficiently slowing growth.
In the coming months, a relaxation of the Basel leverage ratio (Supplementary Leverage Ratio, SLR) could be proposed in the United States. The aim is to ease the balance sheet constraints on primary dealers, most of which are subsidiaries of large banks, and thereby improve intermediation conditions in the US Treasury market.
Bad Signs For The Business Climate. The ISM manufacturing index fell for a fourth consecutive month in May, to 48.5 (-0.2pp). Trade tensions were reflected in the slowdown in supplier deliveries (56.1, +3.9pp inverted indicator) and the contraction in inventories (46.7, -4.1pp). Most notably, imports reached their lowest since 2009 (39.9, -7.2pp) and new export orders their lowest since spring 2020 (40.1, -3.0pp). The ISM non-manufacturing index contracted (49.9, -1.7pp) on the back of the fall in new orders (46,4, -5.9pp).
A Downbeat Business Climate. The ISM Manufacturing index has declined for 4 consecutive months, and reached 48.6 in April (-0.2pp). Production, employment and new orders were all in contraction territory. The price-paid index (69.8) stood at its highest since 2022. Meanwhile, the ISM Non-Manufacturing index remained positive but slowed (50.8 in March vs. 54.1 in December 2024).
Since WWII ended, 80 years ago this week, the US dollar has been the unparalleled dominant currency at the center of the international monetary and financial system. Every now and then, questions have arisen about this dominance and for brief periods became front page material in the financial press. Despite the excitement invariably elicited, the answer was always, sit tight, nothing is going to change. This time feels different. In particular, financial markets’ reaction to the “Liberation Day” tariff announcements, whereby the dollar and US Treasuries sold off instead of being bought as the safe haven of last resort like in all previous crises. But it would be premature to call the end of dollar dominance.
Every Spring and Fall, economic and financial policymakers from the whole world gather in Washington DC for the IMF/WB Meetings. Thousands of private financial sector professionals tag along. All over town, in both formal and informal settings, participants share and compare with their peers their own assessments of the world’s economic prospects. In my 25 years of taking part in these Meetings, this was one of the most interesting ones, with a pervasive sense among participants of living through a pivotal moment of economic history. In what follows, I offer a distillation of what this global pulse-check revealed.
The tariff offensive led by Donald Trump since his return to the White House has quickly shifted into a face-off with China. Following a cycle of announcements and retaliation, the extra-tariffs applied by the United States to China amount to 145%, compared to 125% in the opposite direction. The shock is of unprecedented magnitude, and the two superpowers are engaged in a negative-sum game.
Since June 2022, the U.S. Federal Reserve has largely reduced its holdings of U.S. Treasury debt as part of its quantitative tightening program, or QT, after having massively expanded them between March 2020 and May 2022, as part of its quantitative easing program, or QE.
After the outperformance of 2023-2024, US growth is expected to slow sharply under the impact of the uncertainty and tariff shocks triggered by the new administration. Recession concerns are returning into the spotlight.
By accelerating the fall in oil prices, the timing between OPEC+'s decision to accelerate quota easing, and the Trump administration’s announcement of the start of a tariff war could limit inflationary pressures for US consumers and put pressure on the cartel's undisciplined members. However, the convergence of interests between the heavyweights of the oil market is likely to be short-lived. This policy is likely to make the economic equation increasingly difficult for US producers. At the same time, by putting pressure on public finances, it poses a risk to the cohesion of the cartel.
Last week, the Trump administration announced tariffs against the entire world which, added to those of previous weeks, will raise the average external tariff of the United States to 22%, compared with 2.5% at the end of 2024. Financial markets have reacted extremely badly, and suggest even more serious fears for US growth than for global growth. Many unknowns remain, but this scenario is the most plausible. For the United States' trading partners, it would be better to resist the temptation to escalate and instead to double down on strengthening the engines of domestic growth. Europe is particularly well placed to do this.
The United States remain the world’s largest economy in nominal GDP terms. Although at the root of the global financial crisis (2008-09), the country has swiftly recovered over the past decade, partly helped by the boom in the shale oil and gas industry. However, it has also lost ground in some other key industrial areas, mainly against China. At the same time, China has become a world leader in the strategic field of information and telecommunication equipment, and therefore a top supplier to US companies. This increased dependency, along with persistent and widening trade deficits, has led to a radical shift in foreign trade policy and a sizeable rise in US tariffs on imports.
As a consequence of the COVID-19 crisis, the US economy fell by 3.4% in 2020. The recession -the deepest since 1946- was nevertheless followed by a swift and strong rebound in 2021, the United-States being among the first countries to be vaccinated as well as to recover from the economic losses caused by the pandemic. In the aftermath of the authorities’ action to limit the consequences of the crisis, public debt and deficits have surged.
