The ‘big beautiful’ budget vs the bond market
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Pushkin. Donald Trump's budget is making its way through the US political system, but markets don't like the look of it that much. The package from the White House, the one big beautiful bill to give its full name, and yes, I am being serious, has received the usual hype from the president because it delivers on some of his big campaign promises. But the Democrats...

I'm Katie Martin, a markets columnist here at FDHQ in very rainy London. I'm not complaining. It's good for the garden.

And I'm joined all the way down the line from New York City by the big fella, Robert Armstrong, high priest of the Unhedged newsletter. Nothing but sunshine here in New York City. Rob, would you say you are big and beautiful? I am big. I'm increasingly big, according to my tailor.

I'll tell you what else you are. You're like famous now for the taco trade that you made up. I guess. The Trump always chickens out trade. I mean, acronyms are very powerful, especially when they remind people of foodstuffs. That is what I've learned from this experience.

I mean, it's all over the financial TV. It's in all the notes I get from the investment banks. And this is a very quick detour, but the latest taco trade was Trump said, oh, I'm going to put a 50% tariff on the EU. And then he immediately... Tacos. ...chickened out on that. Ordered the tacos. Yeah.

But it's relevant. I mean, we're talking about bonds today. The bond market liked that news, right? So that's an offset. But we should talk about the budget as this is a budget show, Katie. God. Let's talk about the budget. Donald Trump is not going to chicken out of the budget. Please tell me, token American, what is in it? Well, I guess the context here is that in general, we're markets people. And in general, markets like it when the U.S. government spends money that it has to borrow.

This kind of brings money into the financial system in a broad way. I mean, there's some nice points about how it raises the money and so forth. But basically, deficit spending makes markets happy up to a point.

The question is, have we reached that point where fiscal largesse... I don't know if I'm pronouncing largesse correctly here. Largesse. Largesse. Fiscal largesse by the U.S. government may have reached a point where it no longer pleases markets, specifically the bond market, and starts to spook them a little bit. And once the bond market gets spooked, you know who gets spooked next, the equity market, and then...

It's nothing but trouble, cats and dogs living together. So basically the budget is more deficit-y than the market was expecting. And as a result, bonds, that is treasury bonds, that is the full faith and credit obligations of the United States have fallen in price and their yields have risen. And as the famous story goes...

Everyone is afraid of the bond market. Especially me. Now, so when you're talking about how deficit-y this whole thing is, another exciting new word you've made up there. Yes. So independent bodies reckon that the bill will add, count them,

$3.3 trillion to US debt over the next 10 years. Quite a lot of dollars. That will mean that the debt-to-GDP ratio of the US will go up from something like 100% to something like 125%, which will be well in excess of the previous high, which was in the aftermath of the Second World War. These are...

huge numbers. And I kind of don't get it because I thought Trump was all about cutting spending. Can you make this make sense to Brits, please? No, I will not even try to make it make sense. But there is some form here on the part of if not Trump, then the Republican Party, the stand and actually the heck with it, both parties. Both parties like to talk about kind of

fiscal sanity when the other party is in charge. But when you are in charge, fiscal sanity is something to be done later. And by the way, there is a reason that both parties act this way, which is that broadly speaking, the market and the world's savers have put up with it perfectly happily. If the world is willing to just charge the United States a couple of percent,

to own its debt, why not? Keep cranking it up. We like money. You're going to give me cheap money? We'll take it. Right?

So the question is, what we're talking about on this show is whether that stops being true. And, you know, you throw around ratios like it's X percent of GDP. The debt is X percent of GDP. But nobody really knows where the ceiling is. No. Japan has a much higher ratio. I forget what Japan is, but it's like 200 something, depending on how you slice it. Right. Japan is always different and special because so much of its debt is held onshore.

True. But what is your household's debt to GDP? What is your mortgage as a multiple of your income, Katie? I mean, I'm not seriously asking you to tell me that. You don't want to know. I don't want to know. Exactly. And, you know, you're still just paying whatever you pay at 600% of GDP or whatever your household runs. So it's not actually all that clear empirically at what point the music has to stop for the United States.

Unlike the United States government, I cannot print money or raise taxes. So let's just have a little bit of a kind of stop and pause and talk about what is actually in the bill, the one big beautiful bill. So first of all, it extends a bunch of tax cuts that have been there since.

Since 2017? Yes. Is that true? That is correct. Trump's first round of tax cuts, which were temporary. And it's worth pausing for a moment on this temporary thing. Budget accounting is done over many years going into the future. So if you want to do something expensive, you can make it look cheaper for the purposes of the accounting by saying it's going to stop happening in five years.

Right. Because then the total cost over 10 years, say, of the bill goes down. But the implicit, the nudge, nudge, wink, wink is always we all know what's going to happen in five years. So we're going to play this game again and we're going to have another five years.

So and there's quite a bit of that in this bill playing about with what sunsets and what does not sunset. But one of another of the interesting things about this big, beautiful bill is it's sort of annoyed everybody in the sense that there's a slice of the Republican Party that says, hell no, we're not cutting enough money from spending here. We need to cut harder. Yes. Whereas the Democratic Party is saying, hang on a minute.

There is no way this doesn't take health care away from people. This is terrible. So where are they cutting the money from? Well, I think the main target, other than Harvard University, which is a whole other discussion, the main target is Medicaid, which is our health care program for the poor. This is your safety net, right? It's safety net. If you have no way of paying it yourself. Yes. And so the knives are coming out for that a little bit.

I don't do social commentary. I don't do budget priorities. I do markets here, so I'm not going to hold forth on that. But the point is there is more spendy than cutty. I'm making up a lot of words on this show. And that came as a surprise.

Yeah. I mean, the markets don't like it over much, but they're not like falling out of bed, rolling downhill. Yes. So the 10-year treasury yield is at 4.5%.

this morning, give or take, which is not a crazy level for it to be at. And I think that is a very important point to keep in mind. It has risen. April 4, 2025, we were at four. So we're up half a percentage point, also known to fancy finance people as 50 basis points or so.

So the bonds have weakened. And as you say, four and a half or so on the 10-year, I'm sure we can live with that. We can. And it should be said that's within the kind of long-term trading range that goes back to 22. But as with so many financial variables, what matters is less the level than the direction of change. Yes. And the direction of change is up for yields, down for bond prices. Also, one level that does sort of matter to people, there is something about...

the number five that really sticks in bond markets heads and the 30 year US treasury bond is trading with a yield of about 5% and that tends to be getting close to what people sometimes call the danger zone and it's

It's not difficult to imagine that at a certain point pretty soon, lots of investors will start saying, hang on, why do I want to be buying stocks when I don't know what's going to happen next, when I could just buy this treasury bond and Uncle Sam is going to pay me back one day with a yield of 5%? And it's a yield of 5%. And let's say we expect inflation to be about 3% for the next 30 years, Katie, right? That means you're just collecting 2% a year in real terms from the U.S. government.

For 30 years. Just by buying the bond. Just by buying the bond. You don't have to worry about it. Yeah. At a certain point, the bonds just get too good to turn down. Yes. A little wrinkle here is I was reading a note from Goldman Sachs about the market reaction to this proposed budget. And what it's saying is that there are some elements that are unnerving investors because there's potential changes to foreign business taxes, which are

Kind of links uncomfortably to this idea that some investors are worried about taxes on getting their money back out of the U.S. that they've invested. This is news to me. I don't know anything about this. This does sound a shade alarming.

But they're saying, you know, it doesn't directly mean capital controls, but just people are nervous and they're kind of picking through details. But one of the things that the bank says is that what we're seeing again is what they call concerning emerging market-like cross-asset responses to the news flow, which means you have treasury bonds falling in price and the dollar falling in value at the same time. And that is the market's way of saying, okay,

yet not sure that I want to hold U.S. assets at all, really. And that's a bit scary, isn't it? Because normally when something upsets investors or makes them worried about something, they first of all would buy U.S. government bonds, but also the dollar would go up. Neither of those things is happening in the usual way here. We've talked about this on the show before, and it remains kind of the most important thing

or partially explained fact in markets right now, which is why is the dollar so weak? And it's been a little bit stronger the last couple of days. But this is a thing. And I think there's two kind of broad hypotheses about this. One of them is the kind of Katie Martin, it's the beginning of the end, cats and dogs living together kind of hypothesis, which is...

You can't trust the U.S. anymore. They're no longer providing the risk-free assets, the dollar and the treasury that lubricates the whole world financial system. And we're at the very front edge of a very dangerous trend. So that's interpretation number one. And that's what the dollar is signaling to you, that all the old certainties of the pre-Trump world are now open to question. Forget them all. Yeah. Yeah. Now. Now.

Interpretation number two, which I favor because I am a naturally happy, optimistic sort of fellow, is that the world was massively overweight. Everything America.

because everything America had worked so well. And then this kind of slightly weird stuff starts to happen, this budget being only the latest of several strange things, but we have the tariff back and forth, and we have weird treatment of allies by the United States and so forth. And everybody who runs big money looks down at their portfolio, which they really haven't been paying that much attention to up to this point,

And say aloud, crikey, there's a lot of dollars in there. Man, there's a lot of U.S. stocks in there. And they start to say, well, maybe at the margin, I'm still, you know, of course, my preferred assets are still the assets of the United States. But maybe at the margin, I need to make an adjustment here.

And we are continuing to see that adjustment getting made now. I'm not sure those two worldviews are so far apart, actually. No, they are different points on a spectrum. But I'm on the happy part of the spectrum and you are on the lousy part of the spectrum.

That's what I'm accusing you of, is being a grouchy old English person, in any case. British person? I don't know how you prefer to be referred to. Londoner. Let's go for that. Londoner. Grouchy Londoner. London for the past couple of decades, anyway. You know, and we should note, by the way, that the budget process is not over. It can still get tweaked. It is consistent with Trump and Trump's supporters to offer something quite extreme.

And then reach some kind of compromise. So maybe the kind of rebel group of Republicans who actually care a tiny little bit about fiscal sanity, they get some concessions. And certainly I hope so.

That's what the country needs. And maybe that fact will prevail. Let me ask you, if this goes through in its current form and the one big beautiful bill becomes the one big beautiful act, is this the straw that breaks the camel's back? Is this the thing that really pushes bond prices down, pushes yields up really forcefully? If we get past that,

Five on the 10. And by that, I mean the 10-year bond paying a yield of 5% or more to investors. The market is going to start to sweat, and there's going to be a moment of reckoning for the U.S. government. However, I just don't think this is enough. You'd need to combine this rather irresponsible budget with a couple of other dangerous factors, be they geopolitical or domestic political or whatever. But

Surely it is I who should be asking you this question, Katie, because you have more recent experience in your small island country with what happens when budgets go bad and the bond market responds. Yes. Our tiny island nation has very...

what's the word, raw, very raw memory of what happens when bond markets go bad from, I know we've talked about this on the show before, but it is like super relevant here, which is like towards the end of 2022, there was a budget from Prime Minister Liz Truss. If you can't remember her, that's because she was only Prime Minister for 40 something days. She and her Chancellor delivered a budget that the market really did not like. And

Bond prices fell very quickly. Yields absolutely shot through the roof. And then the problem really set in when this hit a couple of tripwires that forced lots of automatic additional selling of UK government bonds.

And it got awfully messy, awfully quickly. And it took the Bank of England to come in and restore some sanity. And then the budget effectively got almost entirely rewritten and redelivered because it was just such a complete disaster. Now, nobody who I've spoken to seriously thinks that the US Treasury's market is going to face that severe of a crisis because...

It's the U.S. market is just so much bigger. It's got so much more depth. No one can see parallels to those tripwires. Thing is, no one can see a tripwire until you fall over on it. I agree with you. The two cases are very different. There are two different kinds of economies exposed to international capital flows in very different ways. But I will say this. Even in America,

You don't know what problems high bond yields are going to cause until you get there. I think the tripwires thing was really informative. Yeah. That you start to have the cost of money go up quickly and suddenly things you didn't think were connected turn out to be connected. Yeah. And there turns out to be leverage in the system in places you didn't know there was leverage in the system.

Yeah. And it's like awful discovery time when you get to 5% or whatever it is. Yeah. And nobody sees this stuff coming ever. But then it starts happening and it's one damn thing after the other. Some hedge fund blows up. The stock market freaks out. The stock market's falling. The bond market doesn't like that. And there's like this whirlpool effect. Yes. So, you know, so it's like you can't just...

casually whistle and hope everything is going to be fine. Because when things do go bad, they're going to go bad all at once, just like they did for Liz Truss. You're right. When stuff gets bad, it gets bad quickly. And none of us want to see that happen. I tell you what we do want to see happen, and that's long short. We're going to be back in a sec with that.

If this government spending in defense goes towards things like R&D that have dual use civilian purposes, you could get spillovers that actually end up enhancing productivity in Europe and so have a more long lasting impact on growth.

To learn more about the intersection of national security and global trade, subscribe to PGM's The Outthinking Investor in your favourite podcast app. Alrighty, now it's time for Long Short, that part of the show where we go long a thing we love or short a thing we hate. Rob, what you got? I am short the bookshop bar. There's a piece in our newspaper about the emergence of the

the bookstore where you drink liquor at the same time. And I hope this doesn't spread to America for the simple reason that I will go to these places, have two drinks, and buy $500 of books that I will never read. Yes. And I mean, it's surprising in a way this business model hasn't been thought of before. Just put alcohol in all the shops. But it will be very unhealthy for the Armstrong family ex-checker.

I kind of like the idea, but I can see how that can go badly wrong. Yeah, you walk out of there with the collected works of Jonathan Swift in a first edition, you know, something. I am going to be long two things, which I know is cheating. Firstly, although I have been in London for the past 20-something years, I am long Liverpool, my home city. My accent is long. What's happened to them? Well...

There was a parade to celebrate Liverpool Football Club's glorious season winning the league. And then there was a horrible tragedy, a horrible incident that literally spoiled the parade. And, you know, Liverpool will bounce back and you'll never walk alone. Yes.

You will never walk alone. You'll never walk alone. But on more financing matters, I am long the euro as a reserve currency. As you said earlier, I'm constantly banging on about this. I wrote about it for the weekend, talking about how Europe needs to up its game and create a decent sized bond market and weave the euro more forcefully into trade and payments and everything else.

Just a couple of days later, Christine Lagarde, president of the European Central Bank, made a speech about all of that stuff, talking about how we need to seize this global euro moment. What I'm saying is... She should have just read your column aloud. You have the ear of power. Kate, you have the ear of power.

Katie, this is a great moment for you. You're basically running the European financial system. Great minds think alike. All I'm saying is there is something in the waters here, people. Mark my words. Okay, that's it from us for now. But listen up again when you're back in your feed on Thursday. And in the meantime, stay big and beautiful.

Unhedged is produced by Jake Harper and edited by Brian Erstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.