Investment Newsletter – July 2025
Over the past five years, US Treasuries have delivered their worst nominal returns on record due to the sharp rise in yields from 2020’s historic lows, reversing years of bond overvaluation. While yields have now normalized near long-term averages, the outlook remains constrained by structurally higher inflation risks. Real returns are expected to remain modest, likely in the low single digits annually, as inflation continues to erode purchasing power . Bonds may once again offer stability within portfolios, but the days of outsized gains from duration are likely over.
Over the last five decades, low and stable inflation has been the exception rather than the norm. It is suggested that a long-term global average inflation rate above 2 percent is typical, even in advanced economies. This reinforces the expectation that inflation will likely remain above central bank targets in the years ahead, limiting the potential for high real returns on fixed income assets.
The US fiscal trajectory is entering a critical phase. Over the past two decades, deficits have deepened significantly during periods of crisis, including the Global Financial Crisis and the Covid-19 pandemic, but unlike past episodes, deficits remain structurally high even in the absence of recession or war . With future projections pointing to deficits between 7 and 12 percent of GDP by 2055, fiscal sustainability is becoming a growing concern. This persistent fiscal imbalance may lead to upward pressure on interest rates, crowding out private investment, and weighing on long-term growth. For investors, this environment raises the likelihood of increased bond supply, steeper yield curves, and a potential repricing of sovereign risk.
The global policy environment remains accommodative but decelerating into 2025 and 2026. After a peak stimulus year in 2024, both monetary and fiscal impulses are projected to fade gradually. However, central banks continue to ease, and fiscal offsets like US tax cuts and increased non-US public spending (China, EU, NATO) help maintain underlying support. While rising US tariff revenues may weigh on growth, they represent a flexible lever that policymakers could reduce to cushion the economy if needed. In this context, the absence of “policy dragons”, aggressive tightening or major fiscal retrenchments, suggests that risk assets may continue to benefit from supportive macro conditions, particularly in early-cycle sectors, international markets, and real assets.
Chair Powell’s decision to hold rates steady reflects a broader caution amid resurging inflation risks. Despite speculation that a change in leadership could usher in a more dovish Fed, the market is increasingly discounting that scenario. Both rates and prediction markets now align in seeing lower odds of an early Powell exit and limited scope for near-term rate cuts. The early 1970s offer a historical parallel to today’s policy dilemma, political pressure for lower rates in an inflationary environment. In 1971, Nixon’s “New Economic Policy” ended Bretton Woods, imposed tariffs, and was followed by aggressive Fed rate cuts under Arthur Burns, despite elevated inflation and unemployment. This sparked short-term asset rallies and currency devaluation, but ultimately contributed to the stagflation of the mid-70s. If Powell were to be replaced and a dovish shift occurs under political influence, we could see a similar setup: short-term market gains, dollar weakness, and long-term inflation risk.
In the current environment, the theoretical appeal of aggressive rate cuts is clouded by market realities. Should Powell capitulate to political pressure and cut rates by 100 to even 300 basis points as suggested by Trump, the short end of the curve may initially rally, but long-end yields are likely to surge as markets preemptively price in future inflation and policy reversal. This dynamic, similar to the September 2024 reaction, reflects growing skepticism over cutting rates into strength rather than weakness. According to Hartnett, the US is transitioning from a H1 2025 “detox” phase into a H2 2025 – H1 2026 nominal GDP boom, driven by falling rates, lower taxes, and potential tariff rollbacks, as fiscal restraint gives way to politically fueled stimulus. Rather than austerity, the preferred path to lower the debt-to-GDP ratio appears to be nominal growth via asset inflation, what Hartnett calls “One Big Beautiful Bubble. ” The strategic trades include shorting the US dollar in anticipation of debasement, going long gold and crypto as hedges against systemic risk, shorting long-duration Treasuries to reflect inflationary steepening, and balancing exposure between US tech and value stocks in EAFE/EM to capture upside while hedging potential overvaluation. With the market likely to front-run these shifts, the time to act is before formal announcements, as liquidity flows and asset repricing may already be underway.
The GENIUS Act, FIT21/CLARITY Acts, and Anti-CBDC Surveillance State Act together create the U.S.’s first integrated federal framework for digital assets, legitimizing privately issued, fully backed payment stablecoins under dual federal–state oversight, resolving SEC–CFTC jurisdictional disputes through a “decentralization test,” and prohibiting a government-issued CBDC to safeguard privacy. The GENIUS Act mandates 1:1 reserve backing, monthly audits, AML compliance, and bans on interest payments and algorithmic models, reinforcing dollar dominance (“cryptomercantilism”) and pushing stablecoin capital toward yield-seeking in DeFi. FIT21/CLARITY clarify asset classifications, provide paths for tokens to shift from SEC to CFTC oversight, create issuance exemptions, and introduce a DeFi safe harbor, though tensions remain over integrating freezable assets. The Anti-CBDC Act locks in a “private-sector first” approach, making compliant stablecoins the de facto digital dollar . Together, these measures are expected to bifurcate DeFi into regulated and permissionless sectors, attract institutional capital and talent back to the U.S., and pit a flexible, pro-innovation “Washington Effect” against the EU’s more rigid MiCA framework, with the no-interest rule emerging as a major driver for new yield solutions.
