Discipline and Divergence

NOTES FROM MILAN

May 23 2025

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This week served as a reminder: in a noisy political environment, the bond market remains the adult in the room.

While headlines continue to focus on election-year theatrics, crypto drama, and political showdowns, the real discipline is being quietly enforced in the Treasury market. The U.S. government’s bond auction this week sent a clear message: the cost of capital is real—and rising—and it’s not waiting for Washington to catch up.

Investors demanded higher yields to absorb new debt. Demand was there, but only at a price. This wasn’t a panic—this was accountability.

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The Bond Market Has No Patience for Spectacle

In many ways, the U.S. bond auction was a referendum—not on any one policy, but on the broader trend: a government running record deficits with no visible fiscal roadmap.

There’s no room left for cheap borrowing without consequences.

The market is pricing in the cost of dysfunction—even as the stock market remains relatively buoyant.

This is what discipline looks like in a post-central-bank world.

Yields rise not because of inflation panic, but because of skepticism toward long-term fiscal governance.

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Europe’s Struggles Continue to Show

At the same time, a new purchasing managers’ survey across Europe painted a dim picture: contracting output, weak demand, and tepid sentiment.

In contrast to the U.S.—where consumer resilience and services continue to hold—the European economy is still stuck in a post-shock slowdown.

Structural energy costs, sluggish reform, and uneven recovery efforts are creating an environment where monetary policy is trapped, and fiscal policy lacks urgency.

Germany in particular, despite its long-term defense and tech plans, remains mired in short-term industrial weakness. France and Italy aren’t faring much better.

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Divergence in Plain Sight

This week’s news gives us a simple but powerful theme: discipline is being imposed in the U.S.—but divergence is unfolding across the Atlantic.

• The U.S. bond market is tightening the leash on fiscal excess—quietly, but firmly.

• The U.S. consumer and services sector remain a relative pillar of strength, especially compared to Europe.

• Europe, meanwhile, lacks the momentum to impose either fiscal accountability or economic acceleration.

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What I’m Watching

• Long-term U.S. yields may remain elevated as bond buyers demand seriousness from fiscal policymakers.

• European equities may struggle until the region shows signs of real economic reacceleration or political coordination.

• Selective exposure to U.S. services, energy, and infrastructure remains more compelling than cyclical bets in Europe—for now.

— Dylan