There are still no clear answers as to what happened to Treasurys to start the week when, despite very fragile risk sentiment, longer-end US yields surged the most this year.
In “What Just Happened To US Treasurys?” I walked through several possible explanations, ranging from the nefarious to the conspiratorial to the (relatively) mundane.
Fast forward to Tuesday and there was no real respite ahead of this week’s auction slate. During the US morning, 10s were 4.24%, up another ~8bps or so, bringing the two-day selloff to ~30bps. As a nascent stock rebound waned, yields slipped, but whatever happens, Scott Bessent saw a good chunk of the decline in US borrowing costs he was so proud of evaporate early this week.
Bessent stuck pretty assiduously in recent weeks to a talking point which kinda/sorta said, “Yeah, this whole stock correction/recession thing’s on purpose, and it’s paying off already because we can now ‘refinance’ our debt at more favorable rates.”
He didn’t put it quite that way, but he almost did on at least a couple of occasions, and it’s dumb as hell for what should be obvious reasons. This isn’t a mortgage. It’s not like Scott can just wake up tomorrow and say, “Ok, yields are down, we’re refinancing!”
As a veritable procession of former officials, Treasury market experts and really just anyone possessed of a passing familiarity with US government finance tried fruitlessly to impress upon the likes of Bessent and that rock-dumb Stan Druckenmiller during the Biden administration, you can issue strategically (or even politically), but there are limits. And more importantly, you can’t try to actively (micro)manage the WAM of America’s public debt profile. For one thing, there’s too goddamn much of it. As 1,500 or so people learned the hard way 113 years ago this month, you can’t turn the Titanic on a dime.
Even if you could manage America’s debt like a corporate treasurer, you wouldn’t because — much as this rankles debt hawks — debt servicing costs and related “sustainability” concerns are actually quite low on the list of priorities if you’re in charge of the US Treasury. High on that priority list are concerns like making sure issuance stays predictable and ensuring the US provides, to dollar users around the world, a mix of securities which meets their needs.
But let’s just say, for argument’s sake, that it does make sense to fret over the “sustainability” of America’s “debt” “problem” (lots of scare quotes there). The very last thing you want to do is create the perception that America’s no longer a reliable economic partner and that the current administration’s actively trying to dismantle the very system upon which dollar hegemony was built and predicated in the first place. Because who’d want the bonds then? In some sense: Who’d need them then?
And yet, that’s precisely what Trump’s doing and worse, he’s engaged in an around-the-clock effort to undermine the rule of law in America, raising legitimate questions about — and I can’t even believe I’m saying this — the extent to which financial claims on the US government could be fairly adjudicated in the event Trump simply repudiated them.
Note that bond vol’s been elevated persistently since 2022 on a variety of concerns ranging from inflation to deficits to political dysfunction. Ratios of bond vol to equity and credit vol over that period have been high, suggesting a sea change in the risk profile of US government debt. Now there’s a new worry in that regard: Banana republic risk.
Pretty much every day since 2016, something’s happened which seemed far-fetched the previous day. I remember, vividly, Wall Street strategists saying, in October of 2020, that the notion Trump wouldn’t cede power peacefully in the event of a lost election was ridiculous. And look what happened less than three months later.
In case you haven’t noticed, Trump’s in the process of commandeering the US legal system. Last month, he basically told the nation’s largest law firms that engaging in litigation against his administration will result in ruinous consequences. Some firms are vowing to resist, others went ahead and bent the proverbial knee.
That’s a mob tactic, and I don’t just mean in the sort of generic, roll-your-eyes sense that we always describe Trump’s modus operandi as reminiscent of the New York and New Jersey mafia. If you’re old enough to remember The Sopranos, you might recall that in one of the latter seasons, Tony prevents his wife, who’s trying unsuccessfully to divorce him, from going after his assets by paying off and intimidating every lawyer in town. That’s what Trump’s doing, only on the grandest of scales.
Do note: That’s a real thing, folks. It’s not a drill, and I’m not exaggerating. As The New Yorker put it, in a sweeping piece published late last month, “Trump and his allies are engaged in a methodical war against the legal profession.” If you’re inclined to scoff, but haven’t read that piece, you’d do well to read it before sneering. You might come away aghast, even if you voted for Trump. Nobody — I don’t care what your political affiliation — wants to ponder the prospect of having no access to an attorney in the event you need representation in litigation against the government. That’s absolutely terrifying.
These are the sorts of concerns that Treasury holders need to consider. Seriously consider. In the simplest possible terms, the “full faith and credit” pledge that stands behind US Treasurys — a.k.a., interest-bearing dollars, a.k.a., the collateral that makes the world go ’round — is now only as solid as Trump’s commitment to the rule of law, which is to say not very. Treasurys are at this point just an IOU from Trump. If he refuses to pay, you’re going to be Carmela Soprano looking for a divorce attorney.
It’d be silly — which is to say ridiculous — to suggest Monday’s seemingly anomalous price action in Treasurys was indicative of en masse selling from the foreign official sector, or of anything commensurately dramatic. That’s not the point. The point, rather, is that never in my lifetime have Treasurys been less of a sure bet in terms of principal.
I’ll just come right out and say it: I don’t think you’re guaranteed to get your money back anymore. Really I don’t. I think it’s entirely possible that if you’re hostile in any way, shape or form, to Trump, his family or his administration, you could be forced to take a haircut on your US Treasurys.
Let me put it as a question: Would you put your personal assets into personal IOUs issued by Donald Trump? No? Then why would you buy Treasurys at a time when the US government’s almost synonymous with Trump who, by the way, made it clear last month he’s “not joking” (and that’s a direct quote) about staying in office forever?
If I were foreign governments, hedge funds and so on, I’d be getting out now while I still can. While there’s still plenty of liquidity, before I get called down to Mar-a-Lago for a forced restructuring and while the US legal system’s still functioning well enough that I can adjudicate any claims I might need to adjudicate in the event I’m not paid.
Is it realistic to expect countries we’re in the process of bullying to make themselves ever more beholden to America by getting themselves ever deeper into IOUs that Trump may not pay back? No. Or at least you wouldn’t think so. And that’s the sort of thing Bessent should raise with Trump, lest he should look up and discover that not even the recession he’s “trying” to engineer is enough to tamp down US borrowing costs, and lest Trump should have to go hat in hand (or maybe gun in hand is a better way to characterize it) to the Fed asking for (demanding) yield-curve control.
Trump vs Obama 2028, provided the latter doesn’t have an unfortunate heart attack.
Scary stuff, even the likes of Fidelity tie all the fixed interest and money market funds to treasuries; surely if Trump pulled a stunt like that it would crash the entire US financial system.
Seems someone is telling him to crash it and that he can be the hero with a new financial world order. Since we were already at the top of the heap, USD being entrenched and all, why would someone want things to change, and to be replaced with what? Maybe crypto’s the what. Who is the who? Maybe the Fed is on board. Maybe “de-centralized” was how the idea got sold. Brilliant trojan horse with a MLM/ponzi twist, to replace the old ponzi scheme You get in early enough you get filthy rich all while paving the way towards legitmacy. The rules are changing.
Financial and economic winter. Everywhere except where penguins live. Maybe I’ll try to get to Mendoza. I’ll work on my grape harvesting skills in the meantime.
Would be interesting to hear from @therealheisenberg what would happen to the Eurodollar market…wait, forget about it. It would all end. There are no buyers. We are all poor. “The Mandibles.” Barron Trump is monarch.
Ouch. It’s not like I hadn’t thought of this, but to hear it from you hurts more.
I mean, you know, it’s not a “tomorrow” thing, and I don’t think it’s likely to affect your TLT, etc., but just saying “You know what? F-ck everybody, and while I’m at it, f-ck the rule of law too,” is the sort of thing you don’t do if you want to keep people buying your bonds.
Weak auction 3Y.
Yeah, and here’s the standout stat from that: Directs took just 6.2% against a 19% average. Indirects award was 73%, well above the 65% norm. Ultimately, non-dealers participation was weakest in ~15 months
Yikes, long-end really selling off again now.
I’m afraid to look tomorrow morning… You mentioned if we loose the long end god help us.
https://heisenbergreport.com/2025/04/08/scott-my-friend-you-may-have-a-problem/
@therealheisenberg, likely I’m naïve… If the administration is truly concerned about the state of the budget and deficits in general, why not tweak the obvious levers, reduce spending by 2-3% increase the tax by 2-3%, this will give a predictable path to sustainable deficits… so obviously, budget shortcomings are just a red herring. Also, for manufacturing jobs onshoring, if that is the goal, tweak the corporate tax code to encourage creation of US jobs and deter offshoring, no need to blow-up the system
You’re exactly right. They’re not concerned about anything they say they’re concerned with. This is just a bunch of people riding the coattails of a demagogue hoping to parlay his movement into big political and/or financial windfalls for themselves. In Congress, a lot of it’s just survival instincts. Trump doesn’t care. He’s a populist autocrat and he’s running that playbook: Quick fixes for structural problems and use the levers of government to consolidate power in his office and line the pockets of his friends.
Which friends pockets are being lined though? I see a lot of people, musk included getting killed here.
What you see are the daily swings in the market value of a few billionaires’ stock holdings in their own companies. Not nothin’, to be sure, but I’m talking about literal, old school pocket-lining.
If I had an extra $25 million in crypto, I would surely find some usefulness in taking the President out for a spin. Oh! The things I could buy!
I’ll tell you, though, what really is scaring me is that it’s oligarch money helping to fuel the best chaos making they can get.
I think the treasury action over the past 3-4 days is the tip of the iceberg as far as underlying issues and is a huge red flag. The fed has lost control of things for several years and the borrowing costs are not going to come down in the new banana republic. Mix that up with some constant inflation from tariffs and other MAGA Machismo and this likely will not end well. Gold and maybe land are likely the only assets to hold your cash at this point if this keeps going. Not good!
Maybe the recent long end selloff is the basis trade blowing up on the surge in rate vol? Noticed USD swap spreads narrowing (and getting even more negative)
Seems like a Treasury haircut would be unhedgeable. Can’t imagine how any financial asset would be left unscathed. Back in the GFC days there was a weekend when it wasn’t clear ATM’s would continue to function. That was from mortgage debt. Seems like Treasuries would be worse.
During the great depression, real estate was a problem too. Still had to pay the property taxes. And as an aside, it became illegal to hold gold privately.
Too ugly to contemplate. Yet contemplate we must…
TLDR: Would you lend to this clown at 4-5%?
remember the UK Gilts fiasco of 2023?
Turns out that another way of looking at the higher tariffs collected by other countries vs. the tariffs that other countries were paying to the US, as well as the trade deficits of the US, were the equivalent of “points”. As in points that are paid by a borrower to a lender in order to secure a lower interest rate on borrowing.
Trump has made a career out of screwing his creditors… Just saying…
One of the main bases of the success of western economies has been rule of law. If you don’t have that, you are just another Zimbabwe, Myanmar, Russia or ??? (You choose).
Where are those brave Republican congresswomen and men when America really needs them? What’s your senate up to? Cowering in a corner? Are we living a Hollywood movie?
Yeah, this is the underlying problem. But nobody on Wall Street can say it. Why not? Well because if they do, Trump will come after them, for now by calling up Dimon (or whoever), but who knows, maybe a year from now by sending somebody to individual analysts’ homes, like Xi does. That’s how quickly the logic becomes circular when the rule of law goes away: “I can’t comment on the rule of law, because there’s no rule of law.”
The man has lived the lie this long, you think he gives a sh*t?