The below chart summarises performance, in US$, for May and YTD (Year-To-Date) for a select range of global assets.
The adage “sell in May and go away” was initially looking to repeat itself, but then a combination of further tariff postponements, subdued energy prices and stable hard macro data combined with some healthy earnings announcements all helped to reverse the trend spurring a “Risk-On” / “Relief” rally……and when you have a “Risk-On” rally, nearly all the usual suspects rise.
The S&P 500 had its best performance in 18 months delivering +6.3%. The latter was powered by the “Mag-7”which piled on +13.4% – its biggest gain in two years. It’s still down YTD but highlights the perils of trying to time it. Other “Risk-On” assets were High Yield (HY) credit which outperformed Investment Grade (IG). The spread difference between Italian BTPs (=Italian 10y Government Bonds) and the generally perceived safe 10y Bunds (=German 10y Bonds) fell to just 0.98% (98 basis points or bps).
In other words, the risk difference has fallen to its tightest since September 2021. Bitcoin jumped +10.8% closing at an all-time-high on 22nd May. However, as the chart below also shows, long (dated) bonds (US Treasuries, 10y and 30y) fell as worries resurfaced around debt….and rightly so! It’s not just a US story. Debt is piling on in all, major economies……..US, Europe, UK, Japan and China. These “Big 5” are pretty much the world’s GDP and all other nations are satellites that revolve around them.
A big catalyst for this fall in Treasuries was the downgrading of US debt by Moody’s. Furthermore, the US House passed the Tax Bill which extends tax cuts but also adds new features (e.g. tipping becomes exempt). The yield on the 30y Treasury Bond reached 4.93% (+25 bps) having reached an intraday peak of 5.15%. Japan’s 30y Bond yield jumped +26 bps (only 21 bps below its 22nd May peak). Germany’s 30y yield increased +10 bps. Gold gained again for the 5th, consecutive month – albeit by just +0.02%.
Has the US triggered its own demise by marking the end of what has been coined “US exceptionalism” or is this simply a red herring from the real issue at hand……..the ever-growing, unsustainable debt mountain that has been brewing over the years but which has now become a major concern since the (re)emergence of inflation (first, Covid and then Russia-Ukraine)?
In the 17 years following the GFC (Global Financial Crisis) fallout that have been marked by a combination of ultra-loose monetary policy (leading to cheap money on the back of dis-inflation, even deflation and negative real rates due to endless QE) and fiscal policy (during Covid and beyond giving rise to massive deficits), we are now seeing huge interest-servicing costs and spiralling debt. Every 1% rise in rates in the US adds $300bn to the interest-servicing bill. In the UK, the interest-servicing cost stands at almost £100bn – that is the kind of figure a decent defence budget needs!
Dealing with debt (“debt sustainability”) comes down to addressing a combination of factors – very rarely can you deal with it by being reliant on just one. The table below summarises these factors (not exhaustive – I am sure Economists would have others in mind) and also shows the current position (2025) and projections (2026) for each factor and country/region:
| Factor | US – Target | US – Actual | Euro Area – Target | Euro Area – Actual | Japan – Target | Japan – Actual | China – Target | China – Actual |
| Real GDP growth | 2%-2.5% | 1.6%-1.5% | 1.5%-2% | 1.0%-1.2% | ~1% | 0.7%-0.4% | 4%-5% | 4.7%-4.3% |
|
Nominal GDP growth |
4.5%-5.5% | ~4% | 3%-4% | ~3% | ~2% | ~1.5% | 6%-7% | ~6% |
|
Inflation |
2%-3% | 2.7% | 2%-3% | 2.5% | 1.5%-2% | 2.2% | 2%-3% | 0.3% |
|
Primary deficit |
<= 2% of GDP | ~3.5% of GDP | 0% or surplus | ~2% of GDP | 0% | ~3% deficit | <3% of GDP | ~3%+ |
|
Policy rate |
3%-4% | 5.25%-5.5% | 2%-3% | 4.0% | 0% | -0.1%-0.1% | 3%-4% | 3.45% |
|
Productivity growth |
1.5%-2% | ~1.5% | 1.5% | 0.5%-1% | 1% | <0.5% | 3%+ | 2%-2.5% |
These targets do NOT apply individually in isolation! They need to be achieved together – or at least in a balanced combination for debt sustainability to hold. These targets show what level would be broadly consistent with sustaining or improving the Debt-to-GDP ratio. Furthermore, these factors are interdependent i.e. they depend on interactions with each other. Summarising the above:
US: Inflation is in the desired range but real growth is way too slow, the fiscal deficit way too large and interest rates also way too high for comfort. You can see why Trump is constantly bashing Powell!
Euro-Area: the dispersion by country is quite large. Fiscal deficits are very loose in Italy and France while being about right in Germany. Growth is too low while inflation about right.
Japan: Productivity is very poor while growth is very weak – it’s a classic financial repression model. Debt is only sustainable as long as rates stay low – the latter is challenging given the inflation picture.
China: Growth is slipping to the lower end of the target range. Break down the latter into its consumer component and it’s even lower. Inflation is a real concern and poses serious risk of deflation. Productivity is also slipping – structural reforms are needed.
MARKET SUMMARY…
