By Prof. Dr. Jan Viebig, Chief Investment Officer, ODDO BHF SE.

The legislative package that US President Donald Trump pushed through at the end of last week, despite resistance even among Republicans, poses incalculable risks for American economic policy. Using the omnibus procedure, Trump pushed various measures through the legislative process under the name “One Big Beautiful Bill Act” (OBBBA), comprising thousands of pages of detailed regulations. The package was so comprehensive that representatives and senators could not possibly have examined the individual provisions with the necessary diligence. Among other things, Trump extended tax breaks from his first term totalling USD4.5 trillion.

With this legislation, Trump is undermining fiscal discipline and paving the way for an expansion of the already high budget deficit and a further increase in the national debt. Necessary investments in American infrastructure are being linked to short-term tax breaks or subsidies. This results in budget funds being allocated inefficiently, which tends to hinder long-term growth. American public finances will in future be based solely on the principle of hope. Or, as Treasury Secretary Scott Bessent put it: “If we change the growth trajectory of the country, of the economy, then we will stabilise our finances and grow our way out of this.” [1] All that's needed, according to Bessent, is for the economy to grow faster than the debt.

The bet Trump and Bessent are making is risky. But it doesn't necessarily have to backfire. The American stock markets initially reacted positively to the legislation. However, we believe the risks this fiscal policy imposes on the American people are unreasonably high. National finances are too important to be gambled with.

The American national debt currently stands at approximately 123% of the US gross domestic product (GDP), or USD36.2 trillion. In the current fiscal year, USD2 trillion out of USD7 trillion (almost 30%) could be financed with debt. As a percentage of GDP, the budget deficit was just over 6 percent. That's twice what is considered sustainable within the Eurozone. The OBBBA will rapidly worsen the federal budget's underfunding. Higher interest costs and the long-term retention of some tax breaks would increase the deficit by USD5.5 trillion over ten years, according to estimates by the Committee for a Responsible Federal Budget.

Financing Trump's economic policy goals with debt could create a completely new situation in the global bond markets. The British government, under then Prime Minister Liz Truss, already experienced in 2022 what Trump could face at some point. She wanted to finance a tax-cutting programme through bonds and failed in this attempt due to resistance from the financial markets. With this enormous expansion of the national debt, Trump is making himself more dependent on the goodwill of the financial markets than any US president before him. If investors lose confidence in American fiscal policy, it could become difficult to finance or refinance the enormous amount of debt. Yields would rise, and the dollar would fall. In this case, a debt crisis would become a financial crisis. The dollar's status as the world's reserve currency has made it easier for every American government since 1945 to finance its budget through international financial capital. However, this need not remain so, especially since major foreign investors have likely become somewhat more sceptical of investments in the United States in recent months.

The rise in yields on US government bonds is not yet dramatic. But the US government's debt service has already increased significantly over the past three years. At the beginning of July 2022, ten-year Treasuries bore interest at around 3%. Currently, the yield is just under 4.4%. Thirty-year bonds have traded at more than 5% at times. International investors' distrust of the dollar is clearer: From around USD1.03 to the euro when Trump took office on 20 January, the exchange rate has fallen to around USD1.17 today.

But it's not fiscal policy alone. In this case, it's the mix that makes the poison:

• Fiscal policy is too expansionary.

• Monetary policy is too restrictive.

• Trade policy is too erratic.

With the key interest rate in the range of 4.25 to 4.5%, the US Federal Reserve is well above the current inflation rate. Even core inflation, which is generally more persistent than the general inflation rate and therefore harder to combat, was 2.8% in May, while the general inflation rate was 2.4%. Thus, real interest rates, i.e., nominal interest rates minus the inflation rate, remain quite high in the US at just under 2%. Over the past few months, real interest rates have even risen.

However, in our view, the Fed is rightly reluctant to proceed with further interest rate cuts. Trump's capricious tariff policy and risky debt policy are increasing uncertainty and making sound monetary policy more difficult. Thus, interest rates are perhaps weighing more heavily on the US economy than would otherwise be necessary. This is affecting businesses and households, as well as the real estate sector. Furthermore, the economic risks could cause banks to be somewhat more cautious in lending.

Figure 1: US Dollar Index and 10-Year US Treasury Bond Yield: Breaking Correlation

Source: LSEG Datastream, USD Index represents the value of the US dollar against a basket of major currencies

We expect that erratic trade policy and the government's massive reliance on capital markets will contribute to a steepening of the US yield curve. While long-term interest rates in the US and the value of the US dollar have historically been positively correlated, since the tariff policy announced on “Liberation Day,” there has been a significant decoupling of the two variables—as the chart above shows. Since then, the US Dollar Index has been falling, while US Treasury yields initially rose and are now holding at elevated levels. The combination of loose fiscal policy, erratic trade policy, and simultaneously restrictive monetary policy in the US has led to a loss of investor confidence.

[1] Scott Bessent on 23 May 2025 in a tweet on the social media platform X.