Markets didn’t cope particularly well with the latest (and “greatest”) escalations from the “very large brain” of “Tariff Man”.
The Thursday evening broadside against Mexico would have been bad enough on its own, but news on Friday morning that China is set to establish a blacklist of “unreliable entities” suggests Beijing’s Huawei counteroffensive is about to begin. Reports also indicated that the rare earths plan is ready to go as soon as Xi gives the word.
Read more: America The ‘Unreliable Entity’ Prompts China To Establish Corporate Blacklist
Details of Trump’s Mexico plan were extremely disconcerting for a number of reasons, not the least of which is that the tariff rate will go to 25% by October if Mexico doesn’t somehow manage to “dramatically reduce or eliminate the number of illegal aliens crossing its territory into the United States”. How the country is supposed to go about that is anyone’s guess, and it’s also notable that when it comes to defining what constitutes sufficient progress for the tariffs to be lifted, Trump says that’s at his “sole discretion and judgment”. Not to put too fine a point on it, but the US president isn’t known for his “judgment”.
The worsening of trade tensions and international relations more generally exacerbated the ongoing bond rally and another PMI miss out of China didn’t help.
10-year US yields fell to 2.145 at one point. 30-year yields fell to their lowest since November 2016.
As Bloomberg’s Edward Bolingbroke wrote early Friday, the same dynamics that accelerated the bond rally in late March are back in play. “Dollar swap spreads cratered into the Treasuries rally in further evidence that receiving flows are helping drive gains”, he noted. “The move was led by long-end with 30-year spreads tighter by 1.5bp.”
Meanwhile, bund yields fell 4bps to -0.213%. That, folks, is a record low. The previous all-time low was -0.205%, hit on July 6, 2016. The euro, meanwhile, is on track for a fifth consecutive monthly loss against the dollar.
This seems like a good time to gently remind everyone that it’s never a good idea to short the bund. Back in March, when 10-year yields in Germany pushed below zero again, folks wondered if it might be time to play for a repeat of the 2015 bund tantrum. Some desks were kind enough to caution that one should think twice before entering the notorious bund widowmaker.
Note that earlier this month, BofA slashed their year-end yield targets across the board. In that note, called “marking to misery”, the bank said bund yields could touch -25bp in Q3. If things keep going like they’re going, we could get there within days.
After expressing a bit of skepticism towards the ongoing rally in US rates, BofA on Friday said they “have more sympathy” with the recent move in bunds. “Apart from Europe’s inherently greater vulnerability to trade wars, we have also received confirmation that April’s uptick in inflation was likely a fluke and further warning signs of spill-over into the real economy with the German labour market report”, the bank writes, adding that “the espousal of no-deal Brexit by a significant portion of the candidate roster to replace Theresa May, and Italy’s confrontational budget proposal, highlight the Euro Area idiosyncratic risks that open up paths towards new record lows in Bund yields.”
Those new record lows were hit just as the bank’s note was published.
Read more on the bond rally:
I love the smell of the 1930s in the morning.
What truly amazes me is that there has been very little sign of any panic selling in this market especially with the volume of 401 k money with long term capital gains out there.. Am trying to factor in Charlie’s comments from last week pertaining to Liquidity and potential impacts in a sell off but am wondering if he could be off target this time?
The selling has just begun. China is not going to cave and will in fact ramp things up. Mexico can do very little to stop the flow of desperate people to the U.S. Navarro is a pot-addled trade “expert,” and Miller is a sociopath. The MAGA boys will press their racist, retrograde views until stable genius Cheetohlini realizes his razor-thin margin of victory in 2016 (72,000 votes) has gone poof and his future is a bunk next to Bernie Madoff. #MAGA
China is running scared. Just look at the jingoistic anti- America propaganda campaign. Without the US , China runs a trade surplus about equal to Ireland.
Cutting off rare earths just for political purposes would be a grave mistake and will not happen. It will stamp China as the ultimate unreliable country. Within 2 years all US companies with their supply chain in China will move their supply chain to other countries or back to the US . It is amazing that Treasuries are still rallying . Not only is the yield near all time lows(30 year), but it the logical next escalation
Its Bond not BUND, and you think Trump is the ID Ten Tango
No, Steven, it’s not. It’s bund, with a “u”. You don’t know what you’re talking about. Perhaps Google “German bund” and see what you discover.