National Bank of Canada said the U.S. federal fiscal path is still unsustainable, even with added revenue from tariffs. It noted that the Congressional Budget Office (CBO) now forecasts larger total deficits than in its earlier outlook.
The bank said the One, Big, Beautiful Bill and stricter immigration policy are adding to the deficit and debt outlook. It said this is worse than the CBO’s earlier projections from Jan-25.
Fiscal Outlook And Policy Assumptions
It said the projections suggest the primary deficit could shrink over the next decade, but only if policy stays steady. It also said trade policy remains uncertain, including whether tariffs will stay in place after the current administration.
It said uncertainty about future tariff policy increases risk for the U.S. macro outlook. It also said the White House may face pressure ahead of the midterm elections to cut debt, lower costs, and reduce tariff rates.
The U.S. government’s fiscal path is unsustainable, which creates a challenging setup for the U.S. dollar in the weeks ahead. Even with tariff revenue, the debt outlook has worsened compared with the projections released in January 2025. This suggests dollar-linked assets could see more volatility.
This uncertainty—especially around tariff policy ahead of the midterm elections—supports the case for buying volatility. The CBOE Volatility Index (VIX) has been rising and recently touched 19, up from the calmer conditions seen in late 2025. Options premiums on major currency pairs are also rising, reflecting growing concern.
Treasury Yields And Market Positioning
It is also important to watch the Treasury market. Continued government borrowing could push yields higher. The 10-year Treasury yield has already risen to 4.35% since the start of the year, and derivatives markets are pricing in a steeper yield curve. Traders may consider strategies that benefit from higher rates, such as buying put options on Treasury bond futures.
In addition, the combination of the One, Big, Beautiful Bill passed in 2025 and tighter immigration policies has worsened the outlook. The CBO’s latest update confirmed these pressures and now projects that debt held by the public will exceed 110% of GDP by 2030. With this backdrop, long-term bullish positions on the dollar look risky without meaningful hedging.
For now, the Dollar Index (DXY) is stuck between opposing forces and is hovering near 104. While the long-term debt story is a clear negative, sudden global risk events could still trigger a short-term flight to safety that supports the dollar. That is why options strategies like strangles may help capture a breakout in either direction.
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