Investing.com -- The proposed “Mar-a-Lago Accord,” a set of evolving policy ideas circulating within the U.S. administration, could reshape global capital flows and unsettle bond markets, according to UBS.
While not officially endorsed, the framework outlines measures designed to preserve the U.S. dollar’s (USD) global dominance while intentionally weakening its value.
UBS strategists note that these measures aim to lower Treasury yields and reduce the cost of U.S. debt servicing, in part by targeting foreign official holders of Treasuries.
Among the key elements are the potential withholding of interest payments and the issuance of ultra-long-dated or even perpetual bonds to selected foreign reserve holders.
“Withholding one percent of interest from all of them would reduce spending by $34bn,” strategists said. These steps fall under what economists call financial repression, where governments use regulatory powers to lower the cost of borrowing.
UBS warns that these ideas, if enacted, could jeopardize the safe-haven status of Treasuries and spark spikes in long-term yields.
The plan, inspired by historical precedents like the Plaza and Louvre accords, comes against a backdrop of deteriorating fiscal dynamics. The U.S. budget deficit stood at $2.2 trillion in 2024, with debt servicing costs now the largest single budget line item.
Strategists point out that “returning to a sustainable debt path still requires Congress to legislate measures to meaningfully reduce the budget deficit.”
From an investor standpoint, the implications are significant. The potential erosion of confidence in U.S. debt could prompt a reallocation toward other high-quality sovereign bonds, safe-haven currencies, and gold.
“Such episodes can be countered by further financial repression, lowering yields again,” the report adds, while also warning of increased volatility and reduced appeal of longer-dated bonds.
The proposed accord also contemplates a meaningful devaluation of the dollar, which would support higher commodity prices and likely fuel stronger demand for gold as a diversification asset.
“We have already seen investors allocating more to gold in an effort to reduce USD exposure and reap the potential gains of gold’s diversification benefits,” the strategists wrote.
They think that the dollar’s elevated valuation, alongside persistent twin deficits, makes a sharp downward reset increasingly likely if such policies take hold.
While most countries are seen as unlikely to voluntarily join such a pact, those dependent on U.S. security guarantees may be pressured to comply.
UBS said it would consider changes to its asset allocation should some of those ideas gain traction.