Make Yield Curves Normal Again
Expert Macro Commentary
May 30, 2025 | Steven McClurg, CEO
Key Takeaways
- Minimal Relief from New Legislation: The latest tax bill, dubbed “Trump’s Big, Beautiful Bill,” offers limited benefits for most Americans, primarily aiding high earners in high-tax states through an expanded SALT deduction.
- Bond Market Normalizing, Fed Lagging: Treasury yields are aligning with long-term expectations, but the Fed’s short-term rate policy remains artificially high, distorting the yield curve and delaying a needed policy shift toward neutrality.
- Global Recession Signs Intensify: Major economies like China, Germany, and the UK show clear signs of contraction, with weak commodity prices and declining consumer activity underscoring a broader downturn.
- Crypto Holds Relative Strength: While traditional equities face pressure from tariffs and slowing retail participation, crypto markets may benefit from global liquidity trends and offer asymmetric upside despite volatility.
Make Yield Curves Normal Again
Traditional market sentiment remains subdued, and frankly, so do my expectations. This month’s much-publicized legislative action, colloquially known as “Trump’s Big, Beautiful Bill,” brought few surprises. The extension largely codifies prior tax cuts, offering modest benefits for a narrow slice of Americans. The most significant shift? The expansion of the SALT (State and Local Tax) deduction from $10,000 to $40,000.
This change, essentially a federal subsidy to high-tax states, disproportionately benefits individuals earning over $350,000 annually in states like California, New York, and Illinois. In practice, it rewards bloated state budgets and penalizes residents of fiscally disciplined states. For most Americans, struggling under the weight of rising mortgage delinquencies, mounting auto loan defaults, and persistently high grocery prices (with food inflation averaging ~25% over the past four years), this bill offers little relief. The wealthiest households and tipped wage workers saw marginal gains, while the broader public continues to face increasingly unsustainable debt burdens, especially via high-interest credit cards
Misaligned Policy Meets Mounting Global Strain
Turning to fixed income, my primary lens for market interpretation, the bond market is beginning to reflect the long-anticipated normalization in rates. The 10-year Treasury yield is trending toward a natural 5%, in line with predictions I’ve held since exiting bond management in 2016 in favor of digital assets. However, the yield curve remains deeply distorted. The Federal Reserve continues to pin short-term rates to an artificially high 4.50% target, while intermediate maturities (2–5 years) are drifting down toward 4%. Even the 3-month Treasury is softening, with the discount window pricing near 4.30%.
Despite Powell’s 50 bps cut in October, nominally due to a “potentially weakening labor market,” but more likely politically motivated ahead of the election, real rates remain out of step with market dynamics. Inflation has cooled, and the labor market is indeed softening. The yield curve is trying to steepen naturally, and by all accounts, the Fed Funds Rate should be closer to 3.75%. A rational path forward would involve continued quantitative tightening (QT) via balance sheet runoff, while easing short-term rates to alleviate economic drag (light QE), bringing policy to a more neutral footing.
Meanwhile, broader global indicators are flashing red. We are sliding into a global recession, if we’re not already in one. China’s slowdown is now entering its third year. Germany has been in contraction for 18 months. The UK is stagnating, and demographic declines in Japan and Korea present long-term structural headwinds. Commodity signals confirm this picture: oil hovers near $60, while bookings for flights, cruises, and restaurants continue to deteriorate, each a bellwether for consumer health and confidence.
Tariffs and waning consumer sentiment will likely be a drag on equities. Reduced retail participation typically translates to lower trading volumes and muted price discovery. While global liquidity expansion (monetary supply growth) is supportive of risk assets, the headwinds for equities appear stronger than the tailwinds this year.
Crypto’s Asymmetric Edge in a Constrained Market
By contrast, crypto markets may prove more resilient. Crypto benefits from monetary expansion but avoids much of the drag that comes from trade barriers like tariffs. While uncertainty remains a risk, especially for retail-driven segments, crypto may offer asymmetric upside in a landscape where traditional assets look increasingly constrained.
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