The logical breakdown behind the big surge: Will the U.S. see a triple kill of stocks, bonds, and currencies again this summer?

With the shift in narrative, U.S. asset prices have rebounded, but Citigroup believes that the current appreciation of the dollar is only a short-term phenomenon, and there remains a probability of "downward pressure" on U.S. stocks, bonds, and currencies within the year.

According to the news from the Wind Trading Desk, on May 13, Citigroup released a report stating that despite the recent significant market rally, the strengthening dollar, and strong performance of risk assets, continuing to chase gains at this stage is no longer attractive, especially as economic hard data weakens and the risk of rising term premiums increases, the market may face adjustments.

The Citigroup report emphasizes that with the reduction in DOGE's spending and the decline in tariff revenues, the U.S. fiscal budget process may again trigger a surge in term premium, leading to a "triple kill" scenario of falling U.S. stocks, rising U.S. bond yields, and a weakening dollar.

Citigroup research believes that the risks this summer are twofold:

• The expansion of the budget deficit leads to a renewed surge in term premium;
• Economic hard data begins to show weakness, especially as the seasonally weakest period for labor market data is approaching.

Citigroup expects that the May labor market report may begin to show the negative impacts of recent policies, which could lead to a renewed rise in expectations for Federal Reserve interest rate cuts, returning from the current pricing of 50 basis points to the previous 100 basis points.

Shift in Narrative: From Tariff Issues to Fiscal Crisis

Citigroup believes that investors need to connect the policies of the Trump administration to understand them. The DOGE plan aims to cut costs, while tariffs are intended to increase revenue; these policies were originally meant to work in synergy to implement larger-scale tax cuts without significantly increasing the budget deficit.

However, the chaos in the implementation of the DOGE and tariff policies has led to a rapid reversal of these policies, which, while favorable for risk assets, also means that the final version of the Trump tax bill may lead to a larger fiscal deficit than expected.

More concerning is that Citigroup points out that the U.S. term premium is already at a high level. Citigroup's interest rate strategy team uses the 30-year swap spread as a signal for term premium risk, expecting the spread to further narrow to -95 basis points later this year.

Citigroup states that historical data indicates that the state of soaring term premium may persist, and as budget issues become the focus, this situation is likely to occur again. Additionally, foreign demand for U.S. bonds remains sluggish, which will further exacerbate fiscal risks

Investment Strategy: Dollar Rebound Provides Selling Opportunity

The report analyzes that the current dollar rebound offers an opportunity to sell dollars at better prices this year. Citigroup maintains that the dollar's weakness this year is cyclical rather than structural.

Analysts indicate that in an environment of falling stocks and rising yields, the dollar has performed poorly recently, combined with the possibility of rising expectations for Federal Reserve interest rate cuts, which could pose a double blow to the dollar and is expected to push the euro/dollar towards the 1.20 level later this year.

Analysts particularly focus on long positions in the Swiss franc as a safe haven, while noting that the Swiss National Bank cannot intervene in tariff issues in the pharmaceutical industry, as this could be seen as currency manipulation. The recent rebound of the dollar/Swiss franc has made the risk/reward ratio attractive for shorting.

Citigroup emphasizes that as the dominant market narrative shifts from tariff issues to fiscal risks, investors should closely monitor whether the yield on the U.S. 30-year Treasury bond breaks the key 5% level and whether the yield curve steepens, as signals of increased term premium risk, to prepare for potential adjustments in risk assets and a weaker dollar