National Bank of Canada said the US federal fiscal path remains unsustainable, even with extra revenue from tariffs. It said the Congressional Budget Office (CBO) now projects larger cumulative deficits than in its earlier outlook.
The bank said the One, Big, Beautiful Bill and stricter immigration policy add to the deficit and debt outlook. It said this is worse than the CBO’s prior projections from Jan-25.
Fiscal Outlook And Policy Assumptions
It said the projections imply the primary deficit may fall over the next decade, but those forecasts assume stable policy. It also said trade policy is uncertain, including whether tariffs stay in place after the current administration.
It said political uncertainty around future tariff policy adds risk to the US macro backdrop. It also said the White House faces pressure before midterm elections to reduce debt, costs, and tariff rates.
The U.S. government’s fiscal trajectory is unsustainable, creating a tricky environment for the US dollar in the weeks ahead. Even with tariff money coming in, the overall debt picture has gotten worse since the projections we saw back in January 2025. This suggests we should be prepared for more volatility in dollar-related assets.
This high level of uncertainty, especially around future tariff policy ahead of the midterm elections, points towards buying volatility. The CBOE Volatility Index (VIX) has been climbing, recently touching 19, which is a noticeable increase from the calmer markets we experienced in late 2025. Options premiums on major currency pairs are reflecting this growing nervousness.
Treasury Yields And Market Positioning
We should also watch for moves in the Treasury market, as continued government borrowing could push yields higher. The 10-year Treasury yield has already climbed to 4.35% since the new year, and derivative markets are pricing in a steeper yield curve. Traders could consider positions that benefit from rising rates, such as buying put options on Treasury bond futures.
Looking back, the combination of the “One, Big, Beautiful Bill” passed in 2025 and stricter immigration policies has directly contributed to this worsening outlook. The Congressional Budget Office’s latest update confirmed these pressures, now projecting debt held by the public to exceed 110% of GDP by 2030. This fundamental backdrop makes long-term bullish bets on the dollar seem risky without significant hedging.
For now, the Dollar Index (DXY) remains caught between these conflicting forces, hovering around the 104 mark. While the long-term debt story is a clear negative, any sudden global jitters could still trigger a short-term flight to safety, propping up the dollar. This suggests using options strategies like strangles to capture a potential breakout in either direction is a prudent approach.
