$3.8 trillion in additional deficit — what the Trump fiscal plan means for your bond allocation
The Big Beautiful Bill: Why US Fiscal Expansion Is Pushing Long-Term Yields Higher
On May 22, 2026, the US House of Representatives passed the “One Big Beautiful Bill” by a narrow majority — the flagship fiscal legislation of the Trump administration. The bill extends the 2017 tax cuts, increases defence spending, and repeals several green energy taxes from the Inflation Reduction Act. The Congressional Budget Office estimates the net impact at an additional $3.8 trillion in federal deficit over the coming decade. For bond markets, the logic is mechanical: a wider deficit means more Treasury issuance. The US Treasury will need to place significantly more paper on the primary market at a time when the Fed is no longer reinvesting maturities (Quantitative Tightening). This combination — greater supply, unchanged institutional demand — exerts mechanical upward pressure on long-term yields. The Moody’s downgrade of US sovereign debt (from Aaa to Aa1 in May 2025) adds a structural dimension: foreign investors, led by China and Japan which together hold nearly $2 trillion in Treasuries, are demanding a higher risk premium. The result: the 10-year Treasury yield is now trading between 4.75% and 4.90%, a level not seen since autumn 2023.
The first observable reaction is a steepening of the US yield curve. While short-term rates remain anchored by Fed policy (target rate at 4.25–4.50%), long-term rates (10Y, 30Y) are surging under the weight of the fiscal term premium. The 2Y–10Y spread has turned positive for the first time since 2022, signalling the end of inversion: the curve is “normalising”, but driven upward from the long end. In parallel, the US dollar has weakened. The DXY index fell below the symbolic 100 threshold, a level previously considered a structural floor. This depreciation reflects two concurrent dynamics: a partial erosion of foreign investor confidence in US fiscal credibility, and diversification flows into the euro, yen, and gold. Gold, meanwhile, has consolidated its gains near $3,500/oz, reinforcing its status as a safe haven during periods of dollar de-risking. For a European investor, this configuration is paradoxically attractive: USD yields are high, and currency risk is partially mitigated by an already-weakened dollar. A currency-hedged US bond ETF currently offers a gross yield in the range of 3.8–4.2%, far above what the Bund can provide (at 2.68%).
The Fiscal Mechanics: $3.8 Trillion in Additional Deficit
“The bond market can intimidate any government. I used to think that if there was reincarnation, I wanted to come back as the president or the Pope. But now I want to come back as the bond market: it can intimidate everybody.”
James Carville, political strategist — adapted
Market Reaction: Weaker Dollar, Steeper Curve
Allocation Implications: Between Carry and Duration Trap
With yields at these levels, the temptation to lock in long-term US returns is understandable. But caution is warranted on the long end of the curve (20Y–30Y), which carries asymmetric risk. If the US deficit continues to widen — or if another rating agency follows Moody’s — long yields could reach 5.25–5.50%, inflicting significant capital losses on high-duration holdings.
Our tactical recommendation therefore focuses on the 3–7Y segment, which offers the best risk/return trade-off at this juncture. This segment benefits from the natural protection of limited duration (moderate price sensitivity) while capturing yields 200 basis points above comparable Bunds. Currency hedging is essential for euro-based investors: the current USD/EUR hedging cost (rolling 3-month) is approximately 0.6–0.8% annualised, leaving an attractive net carry of 4.0–4.2%.
| Instrument | Gross Yield | EUR Hedge Cost | Net EUR Yield | Duration Risk (+100bp) |
|---|---|---|---|---|
| UST 3–7Y hedged EUR | 4.35% | 0.70% | 3.65% | –4.5% |
| UST 10Y hedged EUR | 4.85% | 0.70% | 4.15% | –8.2% |
| UST 20Y+ hedged EUR | 5.10% | 0.70% | 4.40% | –16.0% |
| Bund 5Y | 2.45% | — | 2.45% | –4.0% |
| OAT 7Y | 3.20% | — | 3.20% | –6.3% |
Three Readings of US Fiscal Risk
« Market Discipline » Reading
Rising long-term yields are the market’s natural response to excess debt. They eventually force fiscal adjustment, as was the case in Europe during the 2010–2012 sovereign debt crisis. Yields at 5% would become unsustainable against a US debt/GDP ratio already at 125%.
« New Regime » Reading
The United States is entering a structural regime of elevated rates, driven by demographic ageing, defence spending, and energy transition. In this scenario, 10Y yields oscillate durably between 4.5% and 5.5%, and carry replaces capital gain as the primary driver of fixed income returns.
« Truss Moment » Reading
A confidence shock (analogous to the UK’s October 2022 “mini-budget”) would trigger panic selling of Treasuries, sending the 10Y toward 6%, and provoking an emergency Fed response. This scenario — unlikely but non-zero — justifies avoiding excessive overweighting of long duration.
What This Means Concretely for Your Portfolio
For a diversified Balanced portfolio (40% bonds, 40% equities, 20% alternatives), rising US yields carry several practical implications. First, the protective role of US bonds in a multi-asset portfolio is reduced: when equities and bonds sell off simultaneously (positive correlation), the diversification benefit disappears. Gold reclaims its primary hedging function in this environment.
Second, European equities benefit indirectly: a weaker dollar supports European exports outside the eurozone, and flows rotating partially out of long Treasuries may redeploy into dividend-paying European equities. The DAX and Eurostoxx 50 display a more attractive equity risk premium than the S&P 500 since the start of the year.
Third, for French wealth management clients with exposure to euro-denominated life insurance (fonds en euros), rising US bond yields gradually reinforce future returns on these funds as insurers reinvest maturities at higher rates. This movement is slow (3–5 year horizon) but structurally positive.
- The “Big Beautiful Bill” is a major macro event: +$3.8 trillion in US deficit over 10 years, with a mechanical upward impact on long-term yields
- UST 10Y at 4.85% offers an attractive carry window for European investors, provided you hedge currency and stay short duration (3–7Y)
- Avoid long duration (20Y+): the asymmetric risk does not justify the additional 25–75 basis points of yield
- A weaker dollar (DXY < 100) favours European equities and gold as diversification assets
- For life insurance holders, rising rates gradually feed the fonds en euros — an additional argument for maintaining exposure
This document is provided for informational purposes only and does not constitute investment advice, a personalised recommendation, or an offer to buy or sell financial products. Past performance is not indicative of future results. All investments carry risks, including the risk of capital loss. The information contained in this article reflects the analysis of Riviera Wealth Management as of the publication date and is subject to change. Riviera Wealth Management is a registered investment advisor (CIF), registered with ORIAS and a member of the CNCGP.
