Well, it’s upon us: The moment when higher US yields aren’t sufficient to attract buyers for Treasurys.
“Bonds.” “It’s a bond story now.” “Treasury turmoil.” Those, and a smattering of similarly foreboding headlines, sat atop the market wraps and sundry morning strategy notes which greeted me Wednesday. I sent out something along the same lines late Tuesday. “The Treasury market’s creaking,” I warned.
As discussed at some length in “Scott, My Friend, You May Have A Problem,” Treasurys are suddenly awake to the reality of “Trump 2.0,” and that’s not a good thing. At one point overnight, 10-year US yields were 4.511% and 30-year yields revisited cycle highs around 5%. The dollar fell.
Folks, that’s bad news. That’s the Liz Truss trade. The US is losing control of its long-end and the currency’s weakening. That’s the stuff of emerging markets, and although some — a lot — of the Treasury selling’s surely down to cash-raising needs from margin calls and the like, as well as forced unwinds in popular arbitrage trades, the combination of an untethered long-end and a weakening currency in the face of acute political turmoil and an associated trust deficit vis-à-vis the government issuing the debt, is the worst of all possible outcomes.
There’s the terrifying chart. Taking the highs from Asia trading Wednesday, 10- and 30-year US yields were up 50bps in four days.
Remember that bullsh-t Scott Bessent was preaching about how the Trump administration was reining in borrowing costs, and how the selloff on Wall Street and the oncoming recession were purposeful and all part of some grand strategy? I told you that was silly. I told you Trump was playing with fire. And here we are.
This administration doesn’t know what they’re doing anymore than Liz Truss and Kwasi Kwarteng did, and with apologies to a lot of well-meaning folks on Wall Street (who are forgiven for being taken aback by the overnight demise of the only world order they’ve ever known), this is what happens when you refuse to believe what’s right in front of you.
Trump said he planned to rule America as tinpot dictator. He didn’t use that term, but everything he said pointed in that direction. Now, we’re getting banana republic-esque juxtapositions, like a screaming bear steepener in the sovereign cash curve and a weaker currency simultaneously.
Steel yourself, because the next narrative’s going to be that this too was purposeful. That Trump was trying to force the Fed into QE by breaking the Treasury market and triggering a funding squeeze. The Fed may well have to intervene, particularly given the dislocations flagged here on Tuesday evening, and what I can only imagine are hopelessly illiquid conditions in Treasurys. But to state the obvious: Trump didn’t plan this.
The only hope now is that the extreme cheapening over the last few days amounts to a big enough concession to lure buyers at today’s 10-year sale and tomorrow’s long bond auction. If those two events go anything like Tuesday’s three-year sale, get into the basement bunker and prep the zombie spray. (Not really, but you get the point.)
“10-year yields reached 4.511% overnight in a sharp selloff that corresponded with the implementation of Trump’s new tariffs,” BMO’s Ian Lyngen wrote Wednesday morning. “The market remains under pressure and investors are increasingly pondering at what point one should expect the Fed to step in with some type of response to the magnitude of the repricing.”
“The fears of a forced liquidation of US bonds for margin calls drives some of the story, but the ongoing tariff war is the larger issue,” BNY Mellon’s Bob Savage said. “The safe-haven nature of US assets is being questioned,” he added, noting that “higher yields in the US are not yet attracting buyers.”
Chris Turner, at ING, put it in stark terms. “The ‘sell America’ scenario is becoming tangible, as Treasurys and US equities are under pressure,” he said. “The dollar is close to [a] confidence crisis.”
I don’t think the Fed is going to step in materially and save Trump from his shenanigans. That means kneeling to the king.
I suspect more turbulence going on until the end of this week / mid next week, until GOP steps in and tells him to shut it and pause majority of tariffs for 3-6 months. Maybe 10yr needs to exceed 5.00 – 5.50% for that to happen. At that point, Bessent and Navarro will be out. Fed to then comment they will provide support if needed, now that some people at the wheel have changed and tariffs are walked back.
I’m a complete layman, so most likely just wishful thinking from my part.
The Fed will never allow a disorderly collapse of the market for Treasuries. They’ll step in with liquidity (“extraordinary measures”) if it becomes absolutely necessary.
Give me some more of that shiny yellow stuff with date codes Fed can’t seize…
In keeping with today’s theme, I’m assuming you’re talking about yellow cake?
https://www.youtube.com/shorts/awJQmSeKlnM
My favorite part about that one, actually, was always the “I know! I know what to do with it, that’s why I got it wrapped up in this special CIA napkin!” I don’t know why, of everything hilarious about that sketch, that particular line gets me, but it always has.
One of the very best parts of what is my favorite Chapelle skit.
I hope the Fed doesn’t bail him out and we finally capitulate.
If not reserve currency, then … oh, we’re almost there … H touched on it, but without reserve currency can MMT (bigly deficit funding) work? if US$ is just another currency, … ouch! 30yr auction is a signpost imho -who buys and at what yield? I’m not buying, but not selling either … yet.
Is this (tarriffs/madness) all cover, for an unwind that was going to happen anyway? The popping of the massive bubble in financial and property assets with leverage out the wazoo. That somehow it gets to be pinned on foreigners (who’ve DUPED US FOR YEARS!!) according to the script. That the “medicine will be worth it”, is just a lie and projection, known full well by the true dispensers? Nothing else seems to make sense. I keep thinking it cannot be this easy for one person to wreck an entire global financial structure.
Supposedly we didn’t goad Japan into war, and their attack on Pearl Harbor. Are we goading China? Wars don’t make sense for most people involved, just the ones pulling the levers (and their friends). Is that where we are?
Amen
It’s a bit idiotic for the idjut in the WH to rattle the cages of holders of some $10T of UST’s. Once bitten twice shy! You’re supposed to speak softly and carry a big stick not growl loudly and not understand how small your stick is. Let’s hope there can be some recovery in 10yr corporate spreads to UST from the 200bp blow out over the last two months