The current state of financial markets is alarming, as a substantial downturn unfolds, exacerbating expectations within the credit market that the Federal Reserve will soon be compelled to offer support. With Bitcoin (BTC), the leading cryptocurrency, trading down 8% at $75,800, and U.S. stocks facing their worst three-day performance, the sheer scale of the losses is a cause for concern. As of Monday, S&P 500 futures plummeted roughly 5%, contributing to an overall decline approaching 15%.
The Federal Reserve has historically stepped in during financial crises with measures such as rate cuts and other forms of stimulus. Traders, the market participants conditioned by previous interventions, are now betting that the Fed will respond similarly in the current climate.
According to the CME FedWatch Tool, the federal funds futures market is currently pricing in the possibility of as many as five rate cuts in 2025. For the upcoming May 7 meeting, there exists a 61% probability of a 25 basis point cut, potentially lowering the target range to between 4.25% and 4.50%. By the end of the year, projections suggest the fed funds rate could decrease as low as 3.00% to 3.25%.
This heightened risk aversion, coupled with concerns surrounding economic growth and anticipated Fed rate cuts, aligns with the interests of the Trump administration by significantly reducing Treasury yields. The critical 10-year yield, an essential indicator for the U.S. economy, has decreased to 3.923%.
The prevailing belief is that lower yields will facilitate the Treasury’s efforts to refinance trillions of dollars in debt over the next twelve months—a factor influencing the Trump administration’s apparent tolerance for the asset market decline.
This urgency for refinancing can be traced back to a strategic shift under former Treasury Secretary Janet Yellen, who transitioned from issuing long-term coupons to short-term Treasury bills. As of 2023, approximately two-thirds of the deficit has been financed through these short-term instruments, which are usually associated with rates around 5%. While this approach may have temporarily bolstered liquidity, it has also created a looming challenge in the form of costly short-term debt that will soon require rollover.
