The logic behind the big rise is broken: the United States will see a three-killed stocks, bonds and foreign exchanges this summer?

Source: Wall Street News

As the narrative changes, US asset prices rebounded and rose, but Citibank believes that the current appreciation of the US dollar is only a short-term phenomenon, and there is still a probability of "destroyment" in US stocks, bonds and foreign exchanges this year.

According to the Fengfeng Trading Station, Citibank released a report on May 13 saying that although the market has seen significant rises in recent times, the US dollar has strengthened, and risky assets have performed well, it is no longer attractive to continue chasing the rise at the current stage, especially as the market weakens hard economic data and the increased risk of rising maturity premiums increase, the market may face adjustments.

The Citi report emphasized that with the reduction of DOGE's spending reduction and the decline in tariff revenue, the US fiscal budget may once again trigger a surge in term premium, which will lead to a "three-kill" situation in which US stocks fall, US Treasury yields rise, and the weakening of the US dollar.

Citi Research believes that the risks this summer are twofold:

The expanded budget deficit has caused the term premium to soar again;
Hard economic data begins to show weakness, especially the period when labor market data is at its weakest seasonality is approaching.

Citi expects May labor market report may begin to show negative effects of recent policies, which could lead to another rise in Fed rate cut expectations, returning to the previous 100 basis points from 50 basis points of current pricing.

Narrative shift: From tariff issues to fiscal crisis
Citi believes that investors need to connect Trump administration policies to understand. The DOGE program aims to cut costs, tariffs are intended to increase revenue, and these policies are intended to work together to implement larger tax cuts without significantly increasing the fiscal deficit.

However, the chaos in the implementation of DOGE and tariff policies has led to a rapid reversal of policies, which, while positive for risky assets, also means that the final version of the Trump tax bill may lead to a larger fiscal deficit than expected.

What is even more worrying is that Citigroup pointed out that the US term premium is already at a high level. The Citi Rate Strategy Team uses the 30-year swap spread as a signal of maturity premium risk, and expects the spread to narrow further to -95 basis points later this year.

Citi said historical data suggests that the soaring state of maturity premiums may continue, and this is likely to happen again as budget issues become the focus. In addition, demand for U.S. bonds by foreign investors remains sluggish, which will further exacerbate fiscal risks.

Investment Strategy: The dollar rebound provides selling opportunities
The current dollar rebound offers an opportunity to sell the dollar at a better price this year, according to the report. Citi insists that the dollar weakening this year is cyclical rather than structural.

Analysts said that the dollar has performed poorly recently in a context of stock declines and rising yields, combined with the possibility of rising interest rate cuts by the Federal Reserve, which may have a double blow to the dollar and is expected to push the euro/dollar toward the 1.20 level later this year.

Analysts pay particular attention to the attractiveness of Swiss Franc long positions as a safe haven, while noting that the SNB cannot intervene on tariffs in the pharmaceutical industry, as this may be seen as currency manipulation. The recent rebound of the US dollar/CHF makes the risk/rewards attractive to short selling.
Citi stressed that as the dominant market narrative shifts from tariff issues to fiscal risks, investors should pay close attention to whether the US 30-year Treasury yield has exceeded the key level of 5% and whether the yield curve has steepened as a signal of increased maturity premium risk, and prepare for possible risk asset adjustments and weakening of the US dollar.

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