Faced with the continuous fiscal stimulus from the new government, Stephen Jen, head of Eurizon SLJ Capital and a seasoned market veteran, feels deeply worried and has even begun to question whether the USA needs to experience a debt market collapse like that during former UK Prime Minister Liz Truss's term to force the government to change its course.
When the general election ended in November last year, few in the bond market were as optimistic as Stephen Jen, head of Eurizon SLJ Capital and a seasoned market veteran, about Trump's and his DOGE team's cost-cutting measures being able to curb the continuously expanding budget deficit.
However, six months later, Jen had to adjust this determination. Faced with the new government's continuous fiscal stimulus, this market veteran felt deep concern and even began to doubt whether the USA would need to repeat the bond market collapse experienced during the time of former United Kingdom Prime Minister Truss to force the government to change course.
"I haven't completely given up hope," Jen said, "but I admit that we don't seem to be heading in the right direction, and I am worried about what might happen. Perhaps it is necessary to recreate the situation Truss experienced, allowing the USA bond market to compel the government to take action, which essentially means pushing yields close to or above 5%, to force all parties to act correctly."
At the end of 2022, the Truss government caused investors to sell off UK bonds due to its strong push for a massive tax cut plan without matching spending cuts, leading long-term yields to soar by over 150 basis points within days. Although Trump's team has repeatedly emphasized controlling spending, the potential loss in fiscal revenue from the new round of tax cuts being promoted in Congress will far exceed the currently limited scale of spending cuts.
In a phone interview, Jen stated: "Politicians and even the general public may find it hard to imagine the catastrophic consequences of continuously rising debt and deficits — unless a bond market crisis is imminent, there will be little motivation for reform."
By any measure, the current fiscal deficit in the USA is at a dangerous level. Over the past two years, the USA's deficit rate has consistently remained above 6% (June 2023: 6.2%, 2024: 6.4%), which is rare outside of periods of economic recession or war.
The yields on long-term US Treasury bonds have already been rising. As the tax cut plan heightens market concerns about debt issues, the 10-year US Treasury yield is once again approaching the 5% mark. Trump's iconic economic plan is under review in the US House of Representatives. Republican senators hope that the plan will be approved in early July and submitted to Trump for signing.
According to estimates by the USA Congressional Budget Office, by 2034, the House bill will increase the burden of USA Bonds by at least 3.3 trillion dollars and will push the annual deficit rate over 7%.
In a report co-authored with Joana Freire on Tuesday, he detailed the potential of DOGE for meaningful cost reductions—possibly reaching as much as 500 billion dollars—while increased tariffs could add another 300 billion dollars in revenue from import taxes. However, the report noted that this would still leave a deficit gap of 1.2 trillion dollars, which can only be addressed by cutting spending.
Jen stated in an interview: "Merely warning people that this could happen and taking steps to prevent it is not enough. They need to be punished."
It is understood that Jen studied for a Ph.D. in Economics at MIT under Nobel laureates Paul Krugman and the late economist Rudiger Dornbusch, and gained prominence at Morgan Stanley for his research on macro issues from Global trade imbalances to the growth of sovereign wealth funds. He also previously worked at the International Monetary Fund.
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