For a brief moment today, the intelligence community’s revolving door jammed, then flew open. Tulsi Gabbard, the former Democrat turned Trump loyalist who ran the Office of the Director of National Intelligence, has handed in her resignation. The news hit the wires at 14:32 London time and the reaction from the Square Mile was swift. Gilt yields edged up two basis points within the hour. The FTSE 100, which had been on a steady march, stuttered. This is not just a personnel change. This is a signal of instability at a time when markets crave predictability.
Let’s be clear: Gabbard’s tenure was short. She was confirmed only nine months ago, a surprise appointment that raised eyebrows across the pond. Her office coordinates the 18 intelligence agencies. That is a big desk. And now, another empty chair. The question investors are asking is not why she left. The official line is ‘personal reasons,’ but in the City we read between the lines. A source close to the situation tells me it was a clash over budget priorities. The intelligence community is facing a real-terms funding cut of 0.7% for the next fiscal year. Gabbard, who campaigned on ‘fiscal sanity,’ apparently wanted deeper cuts. The White House said no. So she walked.
This is dangerous. Capital flight does not need a war. It needs uncertainty. And an intelligence chief resigning over a budget dispute screams dysfunction. The dollar index, which had been buoyed by hawkish Fed rhetoric, slipped 0.3% against the pound. The yield on the US 10-year Treasury note, already under pressure from sticky inflation, ticked up to 4.42%. The bond market is voting with its feet. It smells a policy vacuum.
Consider the timing. This comes on the same day the US Treasury is selling $42 billion in two-year notes. Demand was mediocre. The bid-to-cover ratio, a measure of appetite, fell to 2.34 from 2.51 at the previous auction. That is a warning. Foreign buyers are getting choosy. China has been quietly reducing its holdings. Japan is on the fence. And now this. A government that cannot keep its intelligence chief in place is a government that cannot command confidence. The market is a harsh judge. It does not care about party loyalty or personal reasons. It cares about execution.
What happens next? The succession plan is unclear. The deputy director, a career civil servant named Rebecca Holt, will take over in an acting capacity. But she is a placeholder. The real decision rests with the President. And he is distracted. The midterms are looming. Trade talks with the EU are at a critical juncture. The last thing he needs is a hole at the top of the intelligence apparatus. But the market does not care about his problems. It sees a gap.
Inflation watch: The core PCE index, the Fed’s preferred gauge, printed at 2.8% yesterday, above expectations. That is an anchor dragging on the economy. The Fed has signalled it will hold rates steady for now, but the bond market is pricing in a 40% chance of a hike by September. That was before Gabbard’s resignation. Now? I would buy the dip in Treasuries if I were you. Not out of patriotism. Out of necessity. The yield curve is steepening. The long end is repricing risk.
Let’s bring this home. Britain should take note. Our own intelligence agency, MI6, faces its own budget review next month. The Chancellor needs to see this and realise: cuts to security are cuts to confidence. The market punishes weak states. Gabbard’s exit is a canary in a coalmine. The canary is dead. Now we see if the coal we breathe is safe. For now, I am shorting volatility. It is the only sane trade.
Final thought: Gabbard was an unconventional choice. She called the intelligence community a ‘bloated bureaucracy.’ She was not wrong. But her resignation proves her point. The system resists change. And the market hates resistance. It wants flow. It wants efficiency. It got a resignation. Not a good look for the world’s largest economy. The bottom line: uncertainty is up. Cash is king. And I am not taking my eyes off the Treasuries auction results tomorrow.
