Both the U.S. and Japanese bond markets are indicating that investors are pricing in more risk for both countries, as the Trump Administration’s economic policies accelerate already existing structural problems in both countries. Is this all part of the plan? Time will tell. Meanwhile, the Gaza war appears to be heading into a terrible and perhaps final next stage. |
Center of Gravity
What you need to know
U.S. credit rating falls & dollar weakens amid rising bond yields
On 16 May, Moody’s became the last major ratings agency to strip the U.S. of its AAA rating, downgrading it to Aa1. The move brings Moody’s in line with Fitch, which downgraded the U.S. to AA+ on 6 August 2023, and S&P Global Ratings, which first lowered the U.S. rating to AA+ on 5 August 2011.
Of the roughly $9 trillion in remaining AAA-rated dollar-denominated debt, most consists of mortgage-backed securities, agency debt (notably from Fannie Mae and Freddie Mac), international issuers such as the International Bank for Reconstruction and Development and the European Investment Bank, and a small number of corporates, including Microsoft and Johnson & Johnson.
A handful of countries still maintain a AAA rating: Australia, Canada, Denmark, Germany, Liechtenstein, Luxembourg, the Netherlands, Norway, Singapore, Sweden, and Switzerland.
The market reaction to Moody’s move was swift. Yields on U.S. 30-year Treasuries jumped to just over 5%, while 10-year yields rose to 4.5%. Stock market futures dropped nearly 1% on the news, reflecting growing investor anxiety over the U.S. fiscal outlook.
The sharp rise in bond yields underscores mounting unease about President Donald Trump’s economic agenda, particularly its fiscal and monetary implications.
Investors are pricing in persistent massive budget deficits, driven by tax cuts, increased defense and infrastructure spending, and a lack of corresponding entitlement reform.
While these measures may offer a short-term boost to growth, they cast long shadows over long-term debt sustainability—especially in a high-rate environment.
At the same time, markets are responding to a broader sense of institutional fragility, including Trump’s public pressure on the Federal Reserve and erratic trade policy, which together may be undermining confidence in the coherence and independence of U.S. macroeconomic management.
The result: investors now demand a higher risk premium for holding U.S. debt, reflecting fears of fiscal dominance, persistent inflation, and weakening foreign demand.
Rising yields are widely seen as a warning that the Trump administration’s policies could threaten the global role of the dollar, jeopardizing the low-cost financing that has long underpinned U.S. power. This may, however, all be part of the plan.
As of mid-May, the U.S. dollar has been steadily declining against major currencies, reversing the strength it showed earlier in the year.
The U.S. Dollar Index has fallen by roughly 8% since January.
This depreciation aligns with a key objective of the Trump administration: to weaken the dollar in order to boost export competitiveness and erode the real value of the country’s vast public debt.
But the rising cost of borrowing risks undermining that goal.
Higher bond yields mean the government must pay more to service its obligations.
At current levels, the U.S. is paying around $1 trillion in interest every quarter—an expense that will only grow if yields continue to climb.
U.S. Foreign & Trade Policy
America First
Japan’s fiscal squeeze grows tighter
Japan’s 40-year bond yield has risen to 3.48%, its highest level in more than two decades.
Responding to calls to issue more debt to finance tax relief, Prime Minister Shigeru Ishiba declined on comments he made today, describing the country’s predicament as “worse than Greece”—a reference to the debt crisis that engulfed Greece between 2008 and 2015.
This comes as Japan’s economy contracts once more. In the first quarter of 2025, GDP shrank at an annualized rate of 0.7%, driven by a sharp 2.3% drop in exports and sluggish consumer spending.
Much of the downturn stems from escalating trade tensions, particularly new U.S. tariffs that have disrupted Japanese exports—especially automobiles.
Although the economy showed resilience in late 2024, with a brief export rebound and moderate household consumption, that momentum has since faded.
Japan now faces a precarious path forward, caught between soft global demand and the structural constraints of a rapidly aging population and weak private investment.
The comparison with Greece is not without merit, though the nature of the threat is different. Between 2008 and 2015, Greece suffered an acute sovereign debt crisis, triggered by a collapse in investor confidence, soaring bond yields, and its lack of monetary sovereignty within the eurozone. Forced into externally imposed austerity, Greece endured a deep recession, unemployment above 25%, and the near-collapse of public services.
Japan, by contrast, faces no such sudden reckoning. Its debt, now exceeding 260% of GDP (far higher than Greece’s at the time) is issued in its own currency. That has long allowed the government to borrow cheaply and avoid the drama of a funding crisis.
Greece’s recovery was hampered by its dependence on the Euro, the European Central Bank, and policies set in Brussels for the whole European Union, not just Greece.
But Japan’s advantage is eroding. Inflation has returned, bond yields have climbed, and debt-servicing costs are beginning to strain public finances.
Japan’s crisis is not one of confidence, but of inertia. Japan faces a grinding convergence of rising costs, slow growth, and delayed reform. Where Greece faced a financial inferno, Japan risks a prolonged fiscal suffocation, made more dangerous by the scale of its obligations and the global normalization of interest rates. Japan still has more tools at its disposal than Greece ever did. But the scale of the problem is larger, and inflation is starting to dull those tools.
Japan’s current economic predicament, which is marked by high public debt, rising bond yields, and fragile growth, is the culmination of nearly four decades of accumulated distortions, many of which trace back to the Plaza Accord of 1985.
That agreement, intended to correct global trade imbalances, triggered a dramatic appreciation of the Yen, halving its value against the dollar within two years.
The resulting export shock prompted Japanese policymakers to slash interest rates and unleash a torrent of cheap credit, fueling one of history’s most notorious asset bubbles in real estate and equities.
When the bubble burst in the early 1990s, Japan fell into a prolonged balance-sheet recession as households and corporations deleveraged and banks were crippled by bad loans. The response by the Japanese Government entrenched a deflationary cycle and led to decades of stagnant growth.
The current rise in Japanese bond yields, cannot be fully understood without considering the broader international context, especially the economic policies of the Trump administration. While domestic factors in Japan (such as persistent inflation and the unwinding of ultra-loose monetary policy) are powerful drivers, the external shock introduced by U.S. trade and fiscal policy is a critical accelerant.
Japan’s export has sector came under renewed pressure from rising U.S. tariffs, weakening trade flows and further undermining the yen’s support.
At the same time, U.S. bond yields climbed sharply under President Donald Trump’s expansive fiscal agenda and Stephen Miran’s push for long-duration issuance, widening interest rate differentials and drawing capital away from Japanese markets.
Today, with inflation finally returning, long-term bond yields have surged, exposing the fragility of Japan’s debt-heavy model. In many ways, the country is still living in the long shadow of the Plaza Accord.
The Middle East
Birth pangs in the birthplace of civilization
End game in Gaza?
Israeli Prime Minister Benjamin Netanyahu today announced the resumption of humanitarian aid deliveries into Gaza, ending a blockade that had been in place since 2 March.
Simultaneously, he declared a new Israeli policy to fully reoccupy the Gaza Strip, from which Israel had unilaterally withdrawn in 2005. Israel also launched an expanded ground operation in Gaza on Sunday, accompanied by a renewed aerial bombardment that, according to health officials in the territory, killed more than 100 people overnight and forced the closure of the last functioning hospital in the northern part of the enclave.
Prior to President Donald Trump’s visit to the Middle East last week, Netanyahu had threatened that if no agreement was reached by the end of the visit, Israel would retake control of the territory.
It is possible that the U.S. quietly pressured Israel to reopen humanitarian corridors as part of an indirect arrangement surrounding the release of Israeli-American soldier Edan Alexander last week.
According to Hamas sources late last week, the deal to resume aid was coordinated via backchannel contacts between American officials and senior Hamas figures and mediated by prominent Arab American Trump supporters.
Although international aid organizations are formally responsible for overseeing the distribution process, Israeli officials claim that Hamas is likely to divert a significant portion of the assistance and resell it on the private market.
Meanwhile, a senior Hamas official confirmed on Saturday that a tentative new round of indirect negotiations with Israel has begun in Doha. The talks, described as taking place “without any preconditions from either side,” are reportedly open to discussions on all issues related to ending the war in Gaza.
New Europe
Europe's center of gravity shifts east, politics moves right, & hostility to migrants from the south rises
Romania elects pro-European president amid foreign interference concerns
Nicușor Dan, the pro-European mayor of Bucharest, has been elected president of Romania with 53.6% of the vote, defeating George Simion, a hard-right candidate with pro-Russian leanings, who conceded shortly after polls closed.
Turnout was particularly strong in the Republic of Moldova, where Romanian citizens voted overwhelmingly for Dan, giving him 88% of the vote. By contrast, Romanian expatriates in more distant parts of the world (less exposed to the geopolitical pressures of Russia) backed Simion by a narrower margin, giving him 55% of their ballots.
The election followed a contentious annulment of the initial first-round results in December 2024. Romania’s Constitutional Court invalidated the outcome, citing serious concerns over foreign interference and electoral misconduct.
The decision was prompted by allegations that far-right independent candidate Călin Georgescu, who had unexpectedly led the first round with 22.94% of the vote, had benefited from a coordinated campaign of Russian-backed disinformation and cyberattacks.
Declassified intelligence reports revealed that Georgescu’s campaign received undeclared financial support and executed a large-scale social media strategy—particularly on TikTok—allegedly orchestrated by Russian actors.
Known Unknowns: The impact of U.S. tariffs on international trade & especially the U.S. bond market. How far the U.S. will take ‘maximum pressure’ on Iran - will it lead to military action. Relations of new Syrian government with international community & ability to maintain stability inside Syria. China’s triggers for military action against Taiwan. U.S. responses to China’s ‘grey zone’ warfare in the South China Sea and north Asia. Ukraine’s ability to withstand Russia’s war of attrition.
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What happened today:
1649 - England declares itself a Commonwealth following the execution of Charles I. 1743 - Jean-Pierre Christin publishes proposal for Celsius temperature scale. 1802 - Napoleon Bonaparte founds the Légion d’honneur. 1828 - U.S. President John Quincy Adams signs the Tariff of Abominations, a protectionist tariff program designed to protect northern manufacturers that was opposed by southerners and almost escalated to civil war between north and south. 1921 - Congress of the Communist International opens in Moscow. 1950 - Egypt, Iraq, Jordan, Lebanon, Saudi Arabia, Syria, and Yemen reject UN plan for Palestinian resettlement. 1967 - Soviet Union ratifies treaty banning nuclear weapons from outer space. 1991 - Croatian parliament votes to secede from Yugoslavia. 1997 - Laurent-Désiré Kabila declares himself president of the Democratic Republic of the Congo. 2009 - Sri Lankan government declares victory over Tamil Tigers, ending 26-year civil war. 2018 - Venezuela holds disputed presidential election; Nicolás Maduro re-elected amid international criticism.
