Trump's bond protection shield is crumbling: investors are turning to Europe!

Trump's bond protection shield is crumbling: investors are turning to Europe!

US President Donald Trump has once again caused unrest on the financial markets with controversial measures. According to a report by NZZ Trump's threatened tariffs and the new tax law, which was passed by a narrow majority in the House of Representatives, are damaging confidence in the US economy. Investors are increasingly turning to Europe, which is having a negative impact on the stock exchanges and the US government bond market. The fact that the 10-year US bond yield has fallen from 4.62% to just under 4.50% shows the stress in the bond market, which is also putting pressure on the stock markets.

Trump's announcement of new tariffs against the EU and Apple has further exacerbated the situation. Many analysts fear that these measures could halt the stock market recovery. The new tax law, also known as the “One Big Beautiful Bill Act,” may increase the U.S. federal deficit, which already stands at nearly $37 trillion and is the highest in the world, experts say. A majority of investors see a possible crash risk in the current situation daily news reported.

Tax relief and rising interest rates

The tax relief in the new law could increase the deficit to up to 7% of gross domestic product (GDP). This would be an alarming development, especially given that the US debt ratio could rise to 124.1% by 2025, while Germany will be at 62.1%. Trump plans to sign the bill by July 4th, which would raise the debt ceiling.

Investors are increasingly concerned about rising bond yields, which mean more expensive borrowing for the U.S. government. At the same time, Trump's uncertain trade policy is causing additional tensions on the markets. Hedge funds and possible sales of government bonds by China, the U.S.'s second-largest creditor, with a total value of $760.8 billion, are also contributing to this market turmoil.

Loss of “safe harbor”

As Ray Dalio warns, the ultimate sustainability of the US national debt may come into question at some point. The decline of the US dollar, which fell by 8% against a basket of currencies in 2023, and the resulting search for alternatives such as the euro are already starting to show consequences. The euro has increasingly established itself as a currency worth investing in, while the DAX has risen more than 17% since January while the S&P 500 has remained flat.

Analysts suspect that the shift of assets to Europe is just beginning. For many investors in Europe, a high private savings rate means that capital is not being sufficiently mobilized. Given the current uncertainties, banks need to offer more attractive investment solutions, while the political process in Europe needs to accelerate to encourage necessary investments.