Since the Paris Agreement (2015), the green bond market has been on the rise. Although still modest on a global scale (USD 2,900 billion, which is barely 2.5% of total bond outstandings), its size has more than quintupled over the last five years. The eurozone has been the driving force behind this take-off, followed at a distance by the United States and China.
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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.
• The euro area government deficit decreased in 2024 to -3.1% of GDP.• Italy and Greece posted primary surpluses even though their interest costs remain high• The fiscal adjustment that still needs to be provided by the countries whose deficits increased in 2024 (France, Austria, Belgium, Finland) will nevertheless act as a brake on growth in the zone.
On Wednesday 5 March, the 10-year Bund yield increased 30bp, the biggest rise since the fall of the Berlin Wall. It continued to move higher the following days, reaching a peak on 11 March. The trigger was the announcement by Friedrich Merz (CDU) and the heads of the CSU and SPD during an evening press conference on Tuesday 4 March 2025 that they agreed to reform the debt brake, that defence spending above 1 percent of GDP would be exempt from this debt brake and that a EUR 500bn fund for infrastructure investments would be created. The developments in the German bond market had sizeable spillover effects across markets in the Eurozone. This didn’t come as a surprise.
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 vulnerability of ASEAN countries to US trade protectionism has increased significantly since 2017. The US has become a key destination for these countries, which export low-intensity tech products (such as textiles and footwear) as well as medium-intensity tech products (mobile phones) and high-intensity tech products (integrated circuits and semiconductors). Vietnam, Thailand and, to a lesser extent, Malaysia have the largest trade surpluses with the US and are therefore the most exposed to a change in US tariff policy.On 2 April, the US government announced an increase in tariffs on ASEAN countries that goes well beyond simple reciprocity
How will Beijing react to the imminent US protectionist measures? Will the central bank allow the yuan to depreciate in order to offset the effect of tariff hikes on the price competitiveness of Chinese exports?
As a result of the post-Covid debts surge and rising interest rates, the financial burden on governments is increasing. In the OECD, it has reached 3.3% of GDP, its highest level since 2010. For the European Union, the end of the period of cheap money coincides with a substantial increase in its borrowing requirements, partly linked to the need of rearmament. Public finances, already confronted with climate change and ageing populations, are under pressure and will not be able to meet all the challenges alone.
The message delivered by Beijing at the annual meeting of the National People's Congress at the beginning of March was clear: whatever the difficulties linked to trade and technological rivalries with the United States, the Chinese economy must achieve growth of close to 5% in 2025. The target has remained unchanged since 2023. It seems particularly ambitious this year, given that external demand, the driving force behind Chinese growth in 2024, is set to weaken significantly due to the rise in protectionist measures against China. The authorities are counting on domestic demand to pick up the slack, but this is still coming up against powerful obstacles
After being left reeling by the unexpected money-market crisis during its first round of quantitative tightening (QT1), the US Federal Reserve (Fed) intends to manage the second (QT2) with the utmost caution. This means reducing its securities portfolio without creating a shortage in central bank money, in view of the liquidity requirements imposed on banks under the Basel 3 framework. As it is unable to estimate the optimum amount of central bank reserves needed to ensure that its monetary policy is properly implemented, the Fed aims to reduce the stock of reserves to a sufficiently "ample" level.If QT2 is ended too early, it would have to activate its liquidity draining tools in order to limit the downwards pressure on short-term market rates
They say the Davos consensus is always wrong, but it usually takes longer than a couple of months to be apparent. Not so in 2025.
Government bond yields in advanced economies are highly correlated, much more than the correlation of real GDP growth. Governments should be cognizant that a lack of fiscal discipline can create negative externalities, by pushing up bond yields abroad. Given the prospect of huge financing needs in the public and private sector, every issuer of debt should prepare for the possibility of structurally higher interest rates and stress test his balance sheet in order to test its resilience.
Inflation is no longer the No. 1 economic problem that it has been for the past three years, but it remains a major challenge. While it has not reached its 2% target yet, and the last pockets are slowly deflating, new inflationary pressures are mounting. At this stage, those pressures are limited but not negligible and new inflationary risks, linked to the economic and geopolitical context, are taking shape. The Fed's task is becoming more complicated by the risk of a US stagflation, and the ECB's one happens to be slightly trickier when balancing between downside and upside risks on growth.
