Market Veteran Warns US Bond Collapse May Be Necessary to Address Deficit

Market veteran Stephen Jen, who had previously expressed optimism about the Trump administration and its DOGE team's ability to control the budget deficit, is now expressing disappointment. He suggests that a bond market collapse similar to the one experienced by the UK's Truss government might be necessary to force the US government to address its deficit issues.

In an interview on May 15, Jen, the head of Eurizon SLJ Capital, acknowledged that while he hasn't completely given up hope, the current trajectory is concerning. He fears that a bond market collapse, pushing yields to nearly or above 5%, might be the only way to compel the necessary actions. The UK's Truss government attempted to implement large-scale tax cuts without reducing spending in late 2022, leading to a rapid sell-off of long-term UK bonds and a surge in yields by over 150 basis points in just a few days, ultimately resulting in the government's downfall.

Despite Trump's frequent discussions about reducing spending to lower the deficit, the DOGE team's modest cuts so far have been insufficient to offset the potential revenue loss from the new round of tax cuts being negotiated by Congress. Jen questions whether politicians and the general public can envision a world with significantly increased debt and deficits, and whether they will take preventive measures to avoid such a disaster. He suggests that evidence of a bond market collapse might be necessary to spur action.

Jen, who holds a PhD in economics from the Massachusetts Institute of Technology under Nobel laureate Paul Krugman and the late economist Rudiger Dornbusch, is known for his research on global trade imbalances and sovereign wealth fund growth during his time at Morgan Stanley. He has also worked at the International Monetary Fund.

The US deficit is already substantial by any measure. Over the past two years, the deficit as a percentage of GDP has exceeded 6%, an unusually high burden outside of economic recessions or major wars. For the 2024 fiscal year, this ratio is projected to be 6.4%, higher than the 6.2% in 2023. The Trump administration is pushing forward with a large-scale tax cut plan, with Republican lawmakers aiming to secure approval and submit it to Trump for signature by early July. The Responsible Budget Committee estimates that the House bill will increase the US debt burden by at least 330 billion dollars and raise the annual deficit to over 7% of GDP by 2034.

As the tax cut plan exacerbates investor concerns about the US's rising debt burden, long-term US Treasury yields have been rising, with the 10-year yield approaching 5%. This scenario has drawn comparisons to last month, when the 10-year US Treasury yield broke above 4.5%, prompting Trump to delay retaliatory tariffs on multiple countries. The situation then led to speculation about potential policy changes and market reactions.