The Case for Shorting US Treasury Bonds

A Bet on Inflation and Constitutional Conflict

As we observe the ever-evolving political landscape in Washington, D.C., investors are facing a moment of profound uncertainty. This uncertainty is, in part, driven by the current administration’s policies and their potential long-term economic effects. Specifically, we believe there is a compelling case for shorting U.S. Treasury bonds, based on two key catalysts: first, the inflationary nature of the President’s agenda, and second, the possibility that Congressional Democrats could tie the debt ceiling to the removal of President Trump from office. Together, these factors create a potent mix that could put force bond yields higher and trigger significant market shifts.

Catalyst 1: The President’s Agenda is Inflationary

At the heart of the inflationary argument is the economic agenda put forward by the current administration. Specifically his policies on tariffs and immigration. I’m going to spare the reader the reasons why tariffs and the deportation of a significant portion of the agricultural and services workforce would be inflationary. If you are significantly pro-Trump, you likely wouldn’t believe it no matter who argued it. If you are moderate to liberal, I think the inflationary logic is pretty self explanatory.

If we learned nothing else from the Pandemic…when you crimp supply…eventually prices start to head higher. Those costs (along with tariffs) will eventually be passed to the consumer. The result is inflation. The solution to inflation (at least in modern economics): Raise Rates, Fast and Hard.

Catalyst 2: The Debt Limit Crisis and Constitutional Conflict

While the inflationary pressures created by the president’s policies could be significant in their own right, there is a second catalyst at play. In recent years, the U.S. has repeatedly faced crises related to the debt ceiling, with Congress often engaging in high-stakes brinkmanship over the nation’s ability to borrow more money. However, this time the situation could be even more volatile, particularly given the political dynamics at play.

The debt limit is essentially the cap that Congress imposes on the amount of money the U.S. government can borrow. If the debt ceiling is not raised or suspended, the government risks defaulting on its debt obligations, with catastrophic consequences for the U.S. economy. However, what’s different this time is the potential for a constitutional showdown.

It goes without saying that the first few weeks of Trump’s presidency have seen unprecedented challenges to the constitutional authority granted the executive branch of the government. Namely, he’s bypassed them completely in creating DOGE and granting them access to highly sensitive data. Additionally he’s overridden legislative decisions about funding. To say that Democrats are desperate is an understatement.

Here’s the question I’m posing — Would the Democrats be willing to nuke the whole economy to get the ultimate scalp?

If Congressional Democrats believe that the president's policies are unconstitutional or financially reckless, they may be willing to leverage the debt ceiling as a means to challenge his leadership. Republican Congressmen and Senators could be faced with a choice, remove the President or watch the economy explode.

While this may seem unlikely at first glance, the political climate in Washington is increasingly polarized, and both sides are willing to take extraordinary steps to assert their agendas. Regardless, even without a default, Ratings Agency may downgrade US Treasuries if the political stability continues to deteriorate.

The Implications for Investors

Given these two catalysts—the inflationary nature of the president’s agenda and the potential for a breach of the debt limit—the investment case for shorting U.S. Treasury bonds becomes more compelling. The combination of higher inflation and political instability creates an environment in which Treasury bonds may see significant volatility compared to historic norms.

Investors may begin to question the stability of U.S. government debt, and the once-pristine reputation of Treasury bonds could suffer. This could set the stage for a significant market correction, with Treasury bonds at the center of it.

For investors, shorting Treasuries in this environment could be a potentially profitable strategy. By taking a bearish position on bonds, investors could benefit from falling prices as inflation pressures build and political risks rise.

Conclusion

In conclusion, the case for shorting U.S. Treasury bonds is rooted in two key catalysts: first, that the president’s policies are inflationary and will drive up interest rates, and second, that the political situation in Washington, particularly surrounding the debt ceiling, may undermine the stability of the U.S. government and its debt. These factors create an environment where the value of Treasury bonds could decline sharply, making shorting them an attractive strategy for those looking to capitalize on these economic and political risks.

As with all investment strategies, caution is warranted, and thorough research is necessary. However, in a time of political instability and rising inflation, Treasury bonds may no longer be the safe haven they once were. Investors willing to take on the risk of shorting Treasuries could stand to profit as these risks materialize over time.