This is an audio transcript of the Unhedged podcast episode: ‘The ‘big beautiful’ budget vs the bond market’
Katie Martin
Donald Trump’s budget is making its way through the US political system, but markets don’t like the look of it that much. The package from the White House, the “One, Big, Beautiful Bill”, to give its full name — and yes, I am being serious — has received the usual hype from the president because it delivers on some of his big campaign promises.
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But the Democratic party says this all takes from the poor and gives to the rich. Plus, the bill manages to crank the US debt-to-GDP ratio up to extraordinary highs. Today on the show we’re asking, will the bond markets stomach all this, really?
This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I’m Katie Martin, a markets columnist here at FT HQ in very rainy London. I’m not complaining, it’s good for the garden. And I’m joined all the way down the line from New York City by the big fella, Robert Armstrong, high priest of the Unhedged newsletter.
Robert Armstrong
Nothing but sunshine here in New York City.
Katie Martin
Mmm. Rob, would you say you are big and beautiful?
Robert Armstrong
I am big, I’m increasingly big, according to my tailor. (Laughter)
Katie Martin
I’ll tell you what else you are. You’re like famous now for the Taco trade that you made up, the Trump Always Chickens Out trade.
Robert Armstrong
Ah, yes. I mean, acronyms are very powerful, especially when they remind people of foodstuffs. That is what I’ve learned from this experience.
Katie Martin
I mean, it’s all over the financial TV. It’s in all the notes I get from the investment banks. This is a very quick detour, but the latest Taco trade was Trump said, oh, I’m gonna put a 50 per cent tariff on the EU. And then he immediately chickened out on that.
Robert Armstrong
Tacoed. Ordered the tacos. But it’s relevant. I mean, we’re talking about bonds today. The bond market liked that news, right? So that’s an offset. But we should talk about the budget as this is a budget show, Katie. God.
Katie Martin
Let’s talk about the budget. Donald Trump is not going to chicken out of the budget. Please tell me, token American, what is in it?
Robert Armstrong
Well, I guess the context here is that in general, we’re markets people, and in general markets like it when the US government spends money that it has to borrow. This kind of brings money into the financial system, in a broad way. I mean, there’s some nice points about how it raises the money and so forth. But basically, deficit spending makes markets happy, up to a point.
The question is, have we reached that point where fiscal largesse — I don’t know if I’m pronouncing largesse correctly here.
Katie Martin
Largesse.
Robert Armstrong
Fiscal largesse by the US government may have reached a point where it no longer pleases markets, specifically the bond market, and starts to spook them a little bit. And once the bond markets get spooked, you know who gets spooked next — the equity market. And then it’s nothing but trouble, cats and dogs living together.
So basically the budget is more deficit-y than the market was expecting. And as a result, bonds, that is, Treasury bonds — that is, the full faith and credit obligations of the United States — have fallen in price and their yields have risen. And as the famous story goes, everyone is afraid of the bond market.
Katie Martin
Especially me. Now, so when you’re talking about how deficit-y this whole thing is — another exciting new word you’ve made up there — so independent bodies reckon that the bill will add, count ’em, $3.3tn to US debt over the next 10 years, quite a lot of dollars. That will mean that the debt-to-GDP ratio of the US will go up from something like 100 per cent to something like 125 per cent, which will be well in excess of the previous high which was in the aftermath of the second world war. These are huge numbers and I kind of don’t get it ’cause I thought Trump was all about cutting spending. Can you make this make sense to Brits, please?
Robert Armstrong
No, I will not even try to make it make sense. But there is some form here on the part of, if not Trump, then the Republican party . . . and actually, the heck with it, both parties. Both parties like to talk about kind of fiscal sanity when the other party is in charge. But when you are in charge, fiscal sanity is something to be done later.
And by the way, there is a reason that both parties act this way, which is that broadly speaking the market and the world’s savers have put up with it perfectly happily. If the world is willing to just charge the United States a couple of per cent to own its debt, why not? Keep cranking it up. We like money. You’re gonna give me cheap money? We’ll take it, right?
So the question is, what we’re talking about on this show is whether that stops being true. And, you know, you throw around ratios like it’s X per cent of GDP, debt is X per cent GDP. But nobody really knows where the ceiling is.
Katie Martin
No.
Robert Armstrong
Japan has a much higher ratio. I forget what Japan is, but it’s like 200-something, depending on how you slice it, right?
Katie Martin
Japan is always different and special because so much of its debt is held onshore.
Robert Armstrong
True. But what is your household’s debt to GDP? What is your mortgage as a multiple of your income, Katie? I mean, I’m not asking you to . . . seriously asking you to tell me that.
Katie Martin
You don’t wanna know.
Robert Armstrong
I don’t wanna know. Exactly. And, you know, you’re still just paying whatever you pay, you know, at 600 per cent of GDP or whatever your household runs. So it’s not actually all that clear empirically at what point the music has to stop for the United States.
Katie Martin
Unlike the United States government, I cannot print money or raise taxes. So let’s just have a little bit of a kind of stop and pause and talk about what is actually in the bill, the “One, Big, Beautiful Bill”. So first of all, it extends a bunch of tax cuts that have been there since 2017.
Robert Armstrong
Yes, that is correct. Trump’s first round of tax cuts, which were temporary. And it’s worth pausing for a moment on this temporary thing. Budget accounting is done over many years going into the future. So if you wanna do something expensive, you can make it look cheaper for the purposes of the accounting by saying it’s gonna stop happening in five years, because then the total cost over 10 years, say, of the bill goes down.
But the implicit, the nudge nudge, wink wink, is always, we all know what’s gonna happen in five years. So we’re gonna play this game again, and we’re gonna have another five years. So . . . And there’s quite a bit of that in this bill playing about with what sunsets and what does not sunset.
Katie Martin
But one of . . . Another of the interesting things about this “big, beautiful bill” is it’s sort of annoyed everybody in the sense that there’s a slice of the Republican party that says, hell, no, we’re not cutting enough money from spending here, we need to cut harder, whereas the Democratic party is saying, hang on a minute. There is no way this doesn’t take healthcare away from people. This is terrible. Like, so where are they cutting the money from?
Robert Armstrong
Well, I think the main target, other than Harvard University, which is a whole other discussion . . . The main target is Medicaid, which is our healthcare programme for the poor, and . . .
Katie Martin
This is your safety net, right? This is if you have no way of paying it yourself.
Robert Armstrong
Yes. And so the knives are coming out for that a little bit. I don’t do social commentary. I don’t do budget priorities. I do markets here, so I’m not gonna hold forth on that. But the point is, there is more spendy than cutty. I’m making up a lot of words on this show. (Laughter) And that came as a surprise.
Katie Martin
Yeah. I mean, the markets don’t like it over much, but they’re not, like, falling out of bed, rolling downhill.
Robert Armstrong
Yes. So the 10-year Treasury yield is at 4.5 per cent this morning, give or take, which is not a crazy level for it to be at. And I think that is a very important point to keep in mind. It has risen. April 4 2025, we were at 4, so we’re up half a percentage point, also known to fancy finance people as 50 basis points or so.
Katie Martin
So the bonds have weakened. And as you say, 4.5 or so on the 10-year, I’m sure we can live with that, but we’re . . . There’s something about . . .
Robert Armstrong
We can, and it should be said that’s within the kind of long-term trading range that goes back to ’22. But as with so many financial variables, what matters is less the level than the direction of change. And the direction of change is up for yields, down for bond prices.
Katie Martin
Also, one level that does sort of matter to people, there is something about the number five that really sticks in bond markets’ heads. And the 30-year US Treasury bond is trading with a yield of about 5 per cent. And that tends to be getting close to what people sometimes call the danger zone, and it’s not difficult to imagine that at a certain point pretty soon, lots of investors will start saying, hang on, why do I wanna be buying stocks when I don’t know what’s gonna happen next, when I could just buy this Treasury bond and Uncle Sam is gonna pay me back one day with a yield of 5 per cent.
Robert Armstrong
And it’s a yield of 5 per cent and let’s say we expect inflation to be about 3 per cent for the next 30 years, Katie, right? That means you’re just collecting 2 per cent a year in real terms from the US government for 30 years.
Katie Martin
Just by buying the bond.
Robert Armstrong
Just by buying the bond. You don’t have to worry about it.
Katie Martin
Yeah. At a certain point, the bonds just get too good to turn down. A little wrinkle here is I was reading a note from Goldman Sachs about the market reaction to this proposed budget. And what it’s saying is that there are some elements that are unnerving investors because there’s potential changes to foreign business taxes, which kind of links uncomfortably to this idea that some investors are worried about taxes on getting their money back out of the US that they’ve invested.
Robert Armstrong
This is news to me. I don’t know anything about this. This does sound a shade alarming.
Katie Martin
But they’re saying, you know, it doesn’t directly mean capital controls, but just people are nervous and they’re kind of picking through details. But one of the things that the bank says is that what we’re seeing again is what they call concerning emerging market-like cross-asset responses to the news flow, which means you have Treasury bonds falling in price and the dollar falling in value at the same time. And that is the market’s way of saying, yet not sure that I want to hold US assets at all, really. And that’s a bit scary, isn’t it, because normally when something upsets investors or makes them worried about something, they first of all would buy US government bonds. But also the dollar would go up. Neither of those things is happening in the usual way here.
Robert Armstrong
We’ve talked about this on the show before, and it remains kind of the most important unexplained or partially explained fact in markets right now, which is, why is the dollar so weak? And it’s been a little bit stronger the last couple of days. But this is the thing. And I think there’s two kind of broad hypotheses about this.
One of them is the kind of Katie Martin, it’s the beginning of the end, cats and dogs living together kind of hypothesis, which is you can’t trust the US any more. They’re no longer providing the risk-free assets, the dollar and the Treasury, that lubricates the whole world financial system. And this is a . . . We’re at the very front edge of a very dangerous trend. So that’s interpretation number one. And that’s what the dollar is signalling to you, that all the old certainties of the pre-Trump world are now open to question.
Katie Martin
Forget them all. Yeah.
Robert Armstrong
Now, interpretation number two, which I favour, because I am a naturally happy, optimistic sort of fellow, is that the world was massively overweight everything America because everything America had worked so well. And then this kind of slightly weird stuff starts to happen, this budget being only the latest of several strange things, but we have the tariff back-and-forth, and we have weird treatment of allies by the United States and so forth.
And everybody who runs big money looks down at their portfolio, which they really haven’t been paying that much attention to up to this point, and say aloud, crikey, there’s a lot of dollars in there! Man, there’s a lot of US stocks in there. And they start to say, well, maybe at the margin, I’m still, you know, of course, my preferred assets are still the assets of the United States, but maybe at the margin, I need to make an adjustment here. And we are continuing to see that adjustment getting made now.
Katie Martin
I’m not sure those two world views are so far apart, actually.
Robert Armstrong
No. They are different points on a spectrum. But I’m on the happy part of the spectrum and you are on the lousy part of the spectrum. That’s what I’m accusing you of, is being a grouchy old English person, in any case. British person? I don’t know how you prefer to be referred to, by the way.
Katie Martin
Londoner. Let’s go for that.
Robert Armstrong
Londoner. Grouchy Londoner.
Katie Martin
Well, London for the past couple of decades, anyway.
Robert Armstrong
You know, and we should note, by the way, that the budget process is not over.
Katie Martin
It can still get tweaked.
Robert Armstrong
It is consistent with Trump and Trump’s supporters to offer something quite extreme, and then reach some kind of compromise. So maybe the kind of rebel group of Republicans who actually care a tiny little bit about fiscal sanity, they get some concessions, and certainly I hope so. That’s what the country needs, and maybe that fact will prevail.
Katie Martin
Let me ask you, if this goes through in its current form and the “One, Big, Beautiful Bill” becomes the “One, Big, Beautiful Act”, is this the straw that breaks the camel’s back? Is this the thing that really pushes bond prices down, pushes yields up really forcefully?
Robert Armstrong
If we get past 5 on the 10, and by that I mean the 10-year bond paying a yield of 5 per cent or more to investors, the market is gonna start to sweat and there’s gonna be a moment of reckoning for the US government. However, I just don’t think this is enough. You’d need to combine this rather irresponsible budget with a couple of other dangerous factors, be they geopolitical or domestic political or whatever. But surely it is I who should be asking you this question, Katie, because you have more recent experience in your small island country with what happens when budgets go bad and the bond market responds.
Katie Martin
Yes, our tiny island nation has very, what’s the word, raw, a very raw memory of what happens when bond markets go bad from — I know we’ve talked about this on the show before, but it is like super-relevant here, which is like towards the end of 2022, there was a Budget from Prime Minister Liz Truss. If you can’t remember her, that’s because she was only prime minister for 40-something days. She and her chancellor delivered a Budget that the market really did not like. And bond prices fell very quickly. Yields absolutely shot through the roof. And then the problem really set in when this hit a couple of tripwires that forced lots of automatic additional selling of UK government bonds. And it got awfully messy, awfully quickly, and it took the Bank of England to come in and restore some sanity. And then the Budget effectively got almost entirely rewritten and redelivered because it was just such a complete disaster.
Now nobody who I’ve spoken to seriously thinks that the US Treasuries market is going to face that severe of a crisis because the US market is just so much bigger. It’s got so much more depth. No one can see parallels to those tripwires. Thing is, no one can see a tripwire until you fall over on it.
Robert Armstrong
I agree with you. The two cases are very different. There are two different kinds of economies exposed to international capital flows in very different ways. But I will say this. Even in America, you don’t know what problems high bond yields are gonna cause until you get there.
I think the tripwires thing was really informative, that you start to have the cost of money go up quickly, and suddenly things you didn’t think were connected turn out to be connected. And there turns out to be leverage in the system in places you didn’t know there was leverage in the system. And it’s like awful discovery time when you get to 5 per cent or whatever it is. And nobody sees this stuff coming, ever.
But then it starts happening and it’s one damn thing after the other. Some hedge fund blows up, the stock market freaks out. The stock market’s falling. The bond market doesn’t like that. And there’s like this whirlpool effect. So it’s like you can’t just casually whistle and hope everything is gonna be fine, because when things do go bad, they’re going to go bad all at once, just like they did for Liz Truss.
Katie Martin
You’re right: when stuff gets bad, it gets bad quickly, and none of us want to see that happen. I tell you what we do want to happen, and that’s Long/Short.
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We’re gonna be back in a sec with that.
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Alrighty, now it’s time for Long/Short, that part of the show where we go long a thing we love or short a thing we hate. Rob, what you got?
Robert Armstrong
I am short the bookshop bar. There’s a piece in our newspaper about the emergence of the bookstore where you drink liquor at the same time. And I hope this doesn’t spread to America for the simple reason that I will go to these places, have two drinks, and buy $500 of books that I will never read. I mean, it’s surprising in a way this business model hasn’t been thought of before, but it will be very unhealthy for the Armstrong family exchequer.
Katie Martin
(Laughter) I kind of like the idea, but I can see how that can go badly wrong.
Robert Armstrong
Yeah, you walk out of there with the collected works of Jonathan Swift in a first edition, you know. Something.
Katie Martin
I am going to be long two things, which I know is cheating.
Robert Armstrong
It is cheating.
Katie Martin
Firstly, although I have been in London for the past 20-something years, I am long Liverpool, my home city, my accent is lovely.
Robert Armstrong
Whooo! What’s happened to them?
Katie Martin
Well, there was a parade to celebrate Liverpool Football Club’s glorious season winning the league and then there was a horrible tragedy, a horrible incident that literally spoilt the parade. And, you know, Liverpool will bounce back and you’ll never walk alone. But . . .
Robert Armstrong
Yes. You will never walk alone.
Katie Martin
You’ll never walk alone. But on more finance-y matters, I am long the euro as a reserve currency. As you said earlier, I’m constantly banging on about this. I wrote about it for the weekend, talking about how Europe needs to up its game and create a decent-sized bond market and weave the euro more forcefully into trade and payments and everything else. Just a couple of days later, Christine Lagarde, president of the European Central Bank, made a speech about all of that stuff, talking about how we need to seize this global euro moment.
Robert Armstrong
She should have just read your column aloud. You have the ear of power. Katie, this is a great moment for you. You’re basically running the European financial system.
Katie Martin
Great minds think alike. All I’m saying is there is something in the waters here, people. Mark my words.
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OK, that’s it from us for now. But listen up again when we’re back in your feed on Thursday. And in the meantime, stay big and beautiful.
Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn and Natalie Sadler.
FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to FT.com/unhedgedoffer.
I’m Katie Martin. Thanks for listening.
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