In my last post, I talked about the disconnect between the bad news stories that we were reading and the solid performance of US equities during 2025. In this one, I want to focus specifically on four news stories from last year - the US announcement of punitive tariffs on the rest of the world, the downgrade of the US, the longest shutdown in US government history and unprecedented challenges to the Fed’s perceived independence - and examine how they played out in the rest of the market. I will start with a look at US treasuries, which should have been in the eye of the storm in all of the stories, move on to to currencies, with a focus on the US dollar, then to gold & silver, and close off with a riff on bitcoin. As I look at these diverse markets, with very different outcomes in 2025, I will argue that a loss of trust in institutions (governments, central banks, regulatory authorities) was the thread that best explains their performance.
The Trust Narrative
We often underestimate how much of the global economy and financial markets are built on trust - in central banks to preserve the buying power in currencies, in governments and businesses to honor their contractual commitments, in legal systems to enforce them and in norms restraining behavior. That trust can be tenuous, and when violated, not only can the consequences can be catastrophic, but regaining lost trust can be a long, arduous process. In fact, one of the divides between developed and emerging markets for much of the last century was on the trust dimension, with the implicit assumption that emerging countries were less trustworthy than developed countries. That distinction has been muddied in the twenty first century, as crises and political developments have undercut trust in institutions across the board.
I would argue that 2025 was a particularly testing year, as developments in the United States, a dominant player in the global economy and markets, shook trust, and that loss of trust reverberated across its trading partners and global investors.
The first of the developments was on the tariff front, where decades of progress towards reducing barriers to trade and establishing predictability was upended on Liberation day(on March 31, 2025), where the US imposed what seemed like arbitrary tariffs on countries, but made those tariffs punitively large. In the immediate aftermath, equity markets around the world went into free fall, and I wrote a post in April 2025 about the tariff effect.
Just two weeks later, on April 16, 2025, Moody’s, which had been the lone holdout among the ratings agencies in preserving a Aaa rating for the US, lowered its rating, albeit marginally to Aa1, reducing the number of Aaa rated countries in the world to eight. That rating, though not a complete surprise, still had shock value, and created ripple effects for appraisers and analysts, and I made my assessment in a post in May 2025.
On October 1, 2025, the US government went into shutdown mode, as congress balked at increasing the debt limit for the country and on the terms for a new budget, and unlike previous shutdowns, which lasted a few days, this one stretched into weeks, before an agreement was reached to reopen the government on November 12, 2025.
In the final months of the year, the independence of the Federal Reserve became a subject of discussion as news stories and pronouncements on social media suggested that the administration was seeking to put its imprint on monetary policy, through its nominees.
Depending on your political persuasion, you may have been one side of the debate or the other about each of these developments, but each of them chipped away at trust in the US government and its institutions.
While Donald Trump is the easy answer to why trust is slipping, the truth is that in each case, the slippage has been occurring over much longer. The push towards uninhibited global trade started running out of steam a decade or more ago, as the costs created political backlash. The Moody’s ratings downgrade followed similar actions by S&P, in 2011, and Fitch, in 2023, partly in reaction to government deficit/borrowing and partly to political dysfunction. The Fed’s much-vaunted independence has always been built more on norms rather that legal strictures, and administrations through the decades have managed to nudge central banks to adopt their preferred paths, and especially so in the aftermath of the pandemic.
The Bond Market
The effect of a loss of trust should be visible most clearly and immediately in the bond market, since bond buyers, of US treasuries, are doing so on the expectation that the US government will not default and that the Fed will do its utmost to preserve the dollar’s buying power (and keep inflation low). Since the shocks from the news stories listed in the section above have the potential to alter both default risk and expected inflation, I looked at the movement of US treasuries over the course of 2025:
As you can see, there was little movement in 20-year and 30-year treasuries over the course of the year, but rates dropped, and neither the Moody’s downgrade nor the government shutdown had much effect, and the rise in rates around the downgrade (in April) were more in response to tariffs and preceded the downgrade announcement. In fact, in the face of all of the bad news, the ten-year treasury rate dropped by 39 basis points (from 4.58% to 4.19%) during the year, and short term treasuries dropped even more, effectively altering the slope of the yield curve. To capture that effect, I looked at the evolution of the difference between rates across different maturities over the course of the year:
During 2025, the spread between the 10-year and 30-year treasury doubled, the spread between the 10-year and 2-year increased by seven basis points, but at the short end of the maturity spectrum, the spread between the two year and three month treasuries decreased. The net effect was a much more upward sloping yield curve at the end of 2025 than at its start, and while I do not attribute the power to to the yield curve as a prognosticator of future economy growth that some do, it is still marginally a positive sign for the US economy.
To gauge how the news stories played out on the perception of US government default, I looked at the sovereign CDS spreads for the US, market-set numbers capturing the cost of buying insurance against US government default, in 2025:
After a blip in April, where the sovereign CDS spreads increased from 0.4% to just over 0.5% in April 2025, spreads have dropped back to levels lower than they were at the start of the year.
To get a sense of how expectation of inflation changed over the course of the year, I turned again to a market-based number from the treasury market, where the difference between the US ten-year treasury bond rate and the ten-year US treasury TIPs rate (a real rate) operates as a measure of expected inflation:
In 2025, these estimates suggest that the expected inflation barely budged, ending the year lower than it was at the start. That would have put the market at odds with experts, who forecasted a surge in inflation especially after the tariffs were announced, but would have put it in sync with actual inflation reported during the rest of the year.
On the final question of why the Fed independence fight has not created more turmoil in markets, I start with a different perspective from most, since I believe that the role of Fed in setting interest rates is vastly overstated. As I note in that post, the Fed’s much publicized forays into changing the Fed Funds rate has some effect on the short term treasuries, but long term treasuries are driven less by the Fed’s actions (or inaction) and more by expected inflation and real growth. I capture that relationship every year by estimating an intrinsic ten-year riskfree rate, obtained by summing together actual inflation for the year and real GDP growth and comparing it to the ten-year treasury bond rate:
Download intrinsic riskfree data
Over the seventy years of data in this graph, it is clear that the big movements in treasury rates are captured in the intrinsic risk free rate, with higher inflation in the 1970s coinciding with the rise in the treasury rate, and the sustained low rates of the last decade largely in sync with the low inflation and anemic growth during the period. As you can see , after a stint (2021-25) where the intrinsic risk free rate was well above the ten-year treasury rate, largely because of higher inflation, the treasury rate of 4.18%, at the start of 2026, is within reach of the intrinsic rate of 5.10%, obtained by adding inflation and real growth in 2025. That said, though, I do think that the reason that treasury rates stayed well below the intrinsic risk free rate during this period is because markets believed that the Fed would use its powers to try to get inflation under control, even at the expense of a slowing economy (or a recession). It is this belief that will be put at risk if the Fed becomes viewed as an extension of the government, increasing the risks of inflation spiraling out of control, creating a cycle where higher inflation causes higher interest rates, and attempts by central banks to lower these rates actually feed into even higher inflation. It is in the best interests of governments and politicians to let central banks be independent and set rates, because it will lead to better economic outcomes and lower interest rates, while giving politicians cover for unpleasant choices that have to be made to deliver these results.
I complete the assessment of the bond market in 2025 by looking at corporate bonds, and especially at the default spreads of corporate bonds in different ratings classes during the course of the year:
There seems to be a divergence in how the year played out in the corporate bond market, with the higher rated bonds all seeing flat or lower spreads, but bonds below investment grade (below BBB) seeing an increase in spreads.
The Currency Market
Just as bond markets are driven by trust that governments will not default, unless it has run out of options, and that central banks will protect a currency’s buying power, currency markets are swayed by the same concerns. Here, a split emerged between the bond and currency markets. While bond markets, for the most part, took the news stories of the year in stride, the dollar was clearly knocked off balance, and it weakened over the course of the year, as can be seen in the graph below:
The trade-weighted dollar, a broad index of the dollar against multiple currencies, was down 7.24% for the year, but the dollar lost more value against developed market currencies than against emerging market currencies; it was down 8.19% against the former and 6.34% against the latter.
Gold and Silver
When investors lose trust in governments and central banks, it should come as not surprise that their money leaves financial asset markets and goes into collectibles, and in a post in October 2025, I looked at how this played out specifically in the gold market. In 2025, Gold had one of its best years ever, rising 65% during the year, and silver, the other widely held precious metal, had an even bigger year, rising 148% during the year:
The surge in precious metal prices in 2025 was unusual, at least on one dimension. Gold and silver prices tend to rise during periods of unexpectedly high inflation (1970s) or during intense crises, but at least in 2025, neither seemed to be at play. As we noted earlier, inflation came in much tamer than expected, and equity and neither equity nor bond markets, after a brief meltdown in April, showed no signs of trauma. In fact, if you scale gold price to the CPI, the basis for the golden rule, where the argument that gold rises at roughly the inflation rate over time, gold price performance in 2025 broke the indicator, as the ratio of gold price to the CPI exploded well above historic norms.
It is worth noting that a loss of trust in the US government and, by extension, in the US dollar, have translated into increases in gold holdings at central banks, but that increase, while contributing to gold’s allure, cannot explain its price rise during the year. If the rise in gold prices was a surprise, the rise in silver prices was even more so, and in 2025, silver prices rose enough to bring the ratio of gold to silver prices to below the long term median value:
It seems like the market is pulling in different directions on the trust question, with stocks and bonds largely underplaying them, the currency markets indicating some worry and gold and silver suggesting much bigger consequence to the loss of trust. That does not surprise me since the market is not a monolith, and while the broad investor base might have adopted the response of “What, me worry?”, there is a significant segment of investors that see catastrophic risks emerging, and piling into precious metals.
Bitcoin
I have written off and on about bitcoin over the last fifteen years, and have generally straddled the middle, with both sides of the divide (bitcoin optimists and bitcoin doomsayers) taking issue with me. I have argued that bitcoin can be viewed either as a a central-bank free currency, designed by the paranoid for the paranoid, or millennial gold (a collectible), and that we would know better as we saw how it performed in response to macro developments. In many ways, 2025 provided us with a test, which should, if nothing else, advance our understanding of the endgame for bitcoin. In a year where the dollar was weakened as a global currency and central banking independence was questions, you would have expected to see bitcoin do well, both because of its status as a currency without a central bank and as a collectible. The actual price path for bitcoin, in US dollars and Euros, is captured below:
After setbacks in the first third of the year, bitcoin’s price surged upwards in the middle of the year, making those who had built their narratives around it to look good. In my post on bitcoin on July, I focused on the suggestion that other companies should follow the Microstrategy path and put their cash balances into bitcoin, and argued that it was not a good idea. The months following have vindicated that view, as both bitcoin and Microstrategy have seen pricing collapses, and bitcoin ended the year down 6.4% in US dollar terms and 17.4% in Euro terms.
It remains too early in bitcoin’s life to pass final judgment, but if the story for bitcoin is that it will draw in investors who have lost trust in governments and central banks, it is clear that gold and silver were the draws, at least in 2025, not bitcoin. As a final assessment of how the different asset classes moved in relation to each other, I looked at weekly returns in 2025 in six markets - bitcoin, gold, silver, large US stocks, small US stocks and the ten-year treasury bond - and computed correlations across the assets:
There are only a few co-movements which are large enough to be statistically significant. The first is that bitcoin is much more highly correlated with US equities than it is with its collectible counterparts, suggesting that it draws in risk seekers, not the risk averse. The second is that notwithstanding the fact that US treasuries did very little over the course of the year, on a week-to-week basis, their movements affected stock prices. At least in 2025, higher interest rates (translating into negative bond returns) were accompanied by higher stock prices, casting doubt on the notion that the stock market is being held afloat by Fed activity or inactivity.
Conclusion
The big news stories of the year, from the ratings downgrade to the government shutdown to the soap opera of who would lead the Fed all fed into a storyline of fraying trust in US institutions. While that trust deficit should have led to rising interest rates and a tough year for bonds, actual bond market performance, like equities in the prior post, suggested that markets were not swayed. That clearly does not mean that no one cared, since a subset of investors were concerned enough about the trust issue to push the dollar down and put gold and silver prices on stratospheric upward paths. Bitcoin remained the outlier, moving more with stocks and bonds, albeit without their upside (at least this year) and less with collectibles.
YouTube Video
Data Links
Post links
Anatomy of a Market Crisis: Tariffs, Markets and the Economy (April 2025)
Fed up with Fed Talk? Fact-checking Central Banking Fairy Tales (October 2024)
A Golden Year: Gold Price Surge - The Signal in the Noise (October 2025)
Data Update links
I have a feeling we’ll have another government shut down this year
The predictions about the US economy and financial markets made by Left/Liberal "experts" such as Krugman and Zandi were 100% wrong in 2017-20 and again in 2025-. The Left/Liberal economic model that has as its only input the party affiliation of the US president lacks predictive power. Under the current Orange Regime, all measures of economic and financial performance have performed well: GDP growth, unemployment, inflation, the debt ratio, the stock market, Treasury yields. The dollar has declined: a specific goal of the regime and not an indicator of failure.