All my X’s live in Texas – The feud between Elon Musk and President Trump provided for soap opera-like entertainment in the back half of last week. The tension began when Musk started attacking Trump’s signature legislation, the “One Big Beautiful Bill Act” (OBBBA), which would extend Trump’s first-term tax cuts and tack on some new ones.
To offset some of the cost, OBBBA included spending cuts, including the elimination of a $7,500 tax credit for electric-vehicle buyers that JPMorgan Chase analysts estimate would deal a hit of roughly $1.2 billion to Tesla’s full-year profit. However, the spat between Musk and Trump eased heading into the weekend.
Beyond the bickering, Musk’s main points of discontent, the U.S. deficit and debt, seem to be on point. The Congressional Budget Office estimated last week that the House’s version of OBBBA would increase federal deficits by $3 trillion over the next 10 years. The continued deficit spending and increase in Treasury supply—which Treasury Secretary Scott Bessent has been hesitant to do—will probably require higher yields to garner investor demand.
And this comes at a time when U.S. credit ratings were already being heavily scrutinized. In conjunction with the recent downgrade to the second of 20 credit notches, Moody’s Investors Service warned that “successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs. … In turn, persistent, large fiscal deficits will drive the government’s debt and interest burden higher. The U.S.’ fiscal performance is likely to deteriorate relative to its own past and compared to other highly rated sovereigns.” Furthermore, beyond just the rating agency downgrades, the investor community seems to view U.S. debt as a higher risk compared to other nations. Figure 1 shows the yields on 10-year sovereign bonds of various nations, as of June 6, 2025.
Rate-cut hopefuls will need to spend more time waiting for lower rates: Last week’s U.S. employment figures for May came in better than expected and pointed to continued moderation of job gains. Maybe Musk’s premonition that a recession is due in the second half of 2025 will be prescient, but the bar has been raised for that outcome with this latest print. Nonfarm payrolls increased by 139,000 last month after a combined 95,000 in downward revisions to the prior two months, according to the Bureau of Labor Statistics. Meanwhile, the consensus estimate from economists surveyed by Bloomberg was for 126,000 new jobs. The unemployment rate held at 4.2% and wage growth accelerated 0.4%, month over month, and by 3.9% on an annualized basis.
While slowdowns in hiring are typical in late-stage expansions, some economists think this cycle has drawn out longer due to the global economic uncertainty. “Employers have been ‘hoarding labor’ in the face of massive corrosive uncertainty,” wrote Carl Weinberg, chief economist at High Frequency Economics. “It costs money to fire workers, and we believe firms have been reluctant to lay off workers until they saw the extent of the Trump tariffs.”
The Fed’s Beige Book, which provides anecdotal evidence of regional economic activity in the U.S., echoed this point: “All districts reported elevated levels of economic and policy uncertainty, which have led to hesitancy and a cautious approach to business and household decisions.” Fed Governor Lisa Cook commented that she sees tariffs as potentially stoking inflation and weakening employment. Yet Cook also underscored the importance of price stability when considering changes to interest rates. This past week, Atlanta Fed President Rafael Bostic also said, “We have space to wait and see how the heightened uncertainty affects employment and prices … I am in no hurry to adjust our policy stance.”
The focus on inflation seems to be the operative piece in monetary policy for the moment. Three years ago, first quarter GDP shrunk by 1.0%, quarter over quarter (QoQ). This decline was accompanied by the first rate hike in what became a very aggressive tightening campaign. During that time, inflation rose from 6.2% to 7.0%, according to the Personal Consumption Expenditures (PCE) Price Index. Inflation is now much lower, at 2.3% QoQ. Nevertheless, the Fed’s theme of prioritizing price dominance over labor-market fears persists.
FROM THE DESK
Agency CMBS — Last week was active and constructive for all products, especially on Wednesday and Thursday when Treasuries rallied and pushed the 10-year note yield to 4.35% and below. Almost $1 billion of new issue Fannie DUS traded last week; spreads tightened by up to four basis points (bps). Ginnie Mae volume also picked up and bonds traded well with spreads contracting three to four bps, week over week. We heard Ginne Mae investors were seeing a bit more interest from REMIC buyers. If this interest continues, spreads should tighten more.
Municipals — AAA tax-exempt yields were lower on the short-end of the yield curve and higher on the long-end of the yield curve, week over week. The municipal bond market had one of the busiest weeks on record, with approximately $17 billion of new issuance coming to market last week. However, the housing sector was fairly quiet with only a couple of short-term, cash-collateralized deals pricing. Even with the large supply of new deals, tax-exempt AAA MMD yields were relatively steady due to investors’ receipt of sizable P&I payments on June 1. Consequently, the new issuance was absorbed relatively easily, and tax-exempt yields did not follow the up and down route of Treasury yields throughout the week. Municipal bond funds had a sixth straight week of inflows with $426 million arriving (year-to-date inflows of $5.28 billion), of which the high-yield fund sector had inflows of $281 million.
