U.S. bond yields approaching the critical point of 5%! Market veteran: may require a "debt crisis-style collapse" to force fiscal reform.

Last November, when the general election came to a close, few bond market professionals were as optimistic as Eurizon SLJ Capital's founder and seasoned market veteran Stephen Jen in viewing whether Trump and his DOGE teams cost-cutting measures could curb the continuously expanding budget deficit. However, six months later, Jen had to revise this assessment. Faced with the new government's continuous fiscal stimulus, the market veteran felt deeply concerned, even beginning to doubt whether the United States needs to reenact the bond market collapse seen during the era of former British Prime Minister Thatcher in order to force the government to change its tune. "I haven't completely given up hope," Jen said, "but I admit we don't seem to be moving in the right direction, and I am worried about what might happen. Perhaps it is necessary to recreate the situation experienced by Thatcher, to force the U.S. government to take action by actually pushing yields close to or exceeding 5%, to compel all parties to take the right actions." By the end of 2022, the Thatcher government's massive tax reduction plan, which forced through large tax cuts without accompanying spending cuts, sparked a sell-off of British bonds, causing long-term yields to soar more than 150 basis points in a few days. Despite the Trump team repeatedly emphasizing controlling spending, the potential loss of fiscal revenue from the new round of tax cuts being pushed through Congress may far exceed the current limited scale of spending cuts. In a phone interview, Jen said: "Politicians and even ordinary people may find it hard to imagine the catastrophic consequences of soaring debt and deficits, unless a debt crisis is imminent, there may not be enough impetus for reform." Regardless of how it is measured, the current U.S. fiscal deficit is at dangerous levels. In the past two years, the U.S. deficit rate has remained above 6% (6.2% in 2023, 6.4% in 2024), which is rare in non-economic recession or wartime periods. U.S. long-term bond yields are already rising, and as the tax reduction plan exacerbates concerns about debt issues in the market, the 10-year U.S. bond yield is once again approaching the 5% mark. Trump's signature economic plan is currently under review in the U.S. House of Representatives. Republican senators hope the plan will be approved in early July and submitted to Trump for signing. According to estimates from the Committee for a Responsible Federal Budget, by 2034, the House bill will increase the U.S. debt burden by at least $3.3 trillion, pushing the annual deficit rate to over 7%. In a report co-authored on Tuesday with Joana Freire, Jen still detailed the potential for meaningful cost reductions in DOGE - possibly totaling up to $500 billion - with additional revenue of $300 billion from increased import taxes due to raised tariffs. However, the report stated that this would still leave a deficit gap of $1.2 trillion, which can only be addressed by cutting spending. In an interview, Jen said, "Simply warning people that this may happen and taking measures to prevent it is not enough. They need to be punished." It is understood that while studying for his Ph.D. in Economics at MIT, Jen studied under Nobel laureate Paul Krugman and the late economist Rudiger Dornbusch. He made a name for himself at Morgan Stanley for his research on macro issues such as global trade imbalances and sovereign wealth fund growth. He has also worked for the International Monetary Fund before.