Capital Economics sees evidence of lingering concerns about U.S. fiscal policy

Investing.com -- Signs of stress remain across U.S. financial markets despite a rebound in equities following recent tariff-related volatility, according to brokerage Capital Economics.

The S&P 500 has recovered sharply since “Liberation Day,” but it remains more than 3% below its February peak, in part due to weakness in big tech and concerns about China’s growing AI competitiveness.

Beyond equities, the bond market continues to reflect deeper investor unease. “There is evidence of lingering concerns about U.S. fiscal policy,” the firm said in a Friday report.

While the sharp sell-off in Treasuries earlier this spring was initially driven by fears over Donald Trump’s trade policies and their impact on foreign demand, other indicators suggest fiscal anxiety persists.

The MOVE index, which tracks expected Treasury volatility, has since cooled, and the estimated liquidity premium on 10-year TIPS was also trending lower through late April.

However, “the 5-year U.S. sovereign CDS premium remains quite high, which points to ongoing worries about the debt ceiling as well as the consequences of a deficit-financed fiscal expansion for bond supply,” Capital Economics noted.

In currency markets, the DXY dollar index remains more than 3% below its April 2 level and is trading below levels implied by 10-year TIPS yields.

Assuming liquidity conditions have normalized, Capital Economics suggests that “the residual weakness of the greenback vis-à-vis the 10-year TIPS yield could reflect a broader reassessment of the dollar’s role in the global trading hierarchy.”

“The upshot is that, while we suspect the dust will continue to settle, there are some signs of residual stress in markets that aren’t directly related to Trump’s tariff and trade policies, and which may linger,” the firm continued.

Trade talks could still face setbacks before the current tariff pauses expire, potentially leading to renewed—though likely milder—volatility.