Flight from American assets has become a theme on the market this spring. Expensive risk premiums and increased political uncertainty have made it difficult to economically justify buying American government bonds.
The core of the problem is increased budget deficits, high interest rates, and a gigantic national debt, according to Gustav Helgesson, macro strategist at major bank SEB.
The market wants to be paid for the uncertainty associated with owning American government papers today. That risk has increased, simply, he says.
American Interest Rate Frost
The interest rate on the US 30-year government bond was up over 5.15 percent – the highest level in almost 20 years – after the House of Representatives approved President Donald Trump's budget proposal with large tax cuts on Thursday.
Everyone is now wondering where the US's "Liz Truss moment", says Helgesson.
The "Liz Truss moment" is a reference to the sudden British financial crisis that forced then Prime Minister Liz Truss to resign after a disputed budget in 2022.
The interest rate frost in the US is not an isolated American issue, according to Helgesson.
American government bonds are the foundation of the global financial system, so it affects everyone in one way or another, he says.
His tip to Swedish small savers is therefore to keep an extra eye on long-term market interest rates and the dollar for a while.
The risk is that this spreads to other parts of the world.
Then it becomes a "Liz Truss moment"
But there is no acute crisis in the short term yet, he believes:
If you take into consideration the Trump administration's customs revenue, the country is expected to remain at around the current budget deficit levels, i.e. around 6 percent of GDP.
According to the rating institute Moody's, which last week downgraded the US credit rating, Trump's tax cuts, if permanent, could lift the deficit to 9 percent of GDP.
If you were to get a budget that pushes up the deficit to 9 percent today, the market would reject it. Then we're talking about a "Liz Truss moment", says Helgesson.
But Moody's calculation does not include customs revenue, according to the SEB strategist.
And he expects the US to be able to bring in around 300 billion dollars per year if the Trump tariffs settle around 10 percent, with slightly higher tariffs for China.
