What happened to that long bond call, Mike?
I’m just kidding. But BofA’s most prominent “strategist” did favor the 30-year Treasury as a recession hedge there for a while. In fact, in the April 4 edition of his exceedingly popular weekly “Flow Show” series, Michael Hartnett wrote, “Long Treasurys: [A]nything that impedes the Fed’s ability to cut aggressively [in]to a market and economic crisis (e.g. a slump in the US dollar) is a recipe for bad-to-worse equity action, and bonds [are the] best hedge for this.”
In addition, Hartnett said just seven days ago, “tariffs [are] ultimately deflationary not inflationary [which is] also bullish bonds.”
Got all that? I certainly hope not, because if you traded it, God help you. This was the worst week for 20-years and out US Treasurys since the market broke in March of 2020 and before that November of 2016, the month to which historians will date the collapse of American empire.
Mike got the US dollar “slump” and the “bad-to-worse equity action” right (stocks gained this week, but I think it’s fair to call it a Pyrrhic victory). What he didn’t figure on — and he was hardly alone — was a wholesale abandonment of US assets, including long-end Treasurys, on concerns that the “full faith and credit” pledge doesn’t mean as much, if it means anything at all, with Donald Trump in the Oval Office.
Recall that right up until “Liberation Day,” bonds were doing a halfway decent job hedging the 2025 stock correction. Indeed, on the eve of Trump’s big unveil, the long-end was up 2.5% or so since the election, having recovered from a post-vote selloff in December. At the least, bonds weren’t losing you money.
But starting April 7, it got ugly for US bonds. Really ugly. Like, Marjorie Taylor Greene ugly. (But hey, at least she’s got a knack for market timing!)
That both bonds and stocks have stuck investors with losses since Election Day actually isn’t surprising in and of itself. Remember: The bond market was skeptical of Trump’s fiscal agenda from the get-go and stocks were trading on some of their richest valuations on record.
What’s unique (and uniquely unfortunate) about these past few days is the extent to which the rationale for the losses has shifted to include concerns about the rule of law in America, the very bedrock of the country’s system of governance, and Trump’s commitment to the multi-faceted arrangement which underpins the dollar’s reserve currency status.
In other words, investors are asking questions no one’s ever asked before. Not in the modern era. Long story short, Trump’s gambling with America’s exorbitant privilege.
“US exceptionalism”s ending and ‘US repudiation’ is starting,” Hartnett said this week, calling an end to the system wherein America buys goods from the rest of the world and the rest of the world invests its surplus in US Treasurys. We’re witnessing, Hartnett went on, a “buyers’ strike of US assets.”
The figure above shows the breakdown of ownership in the US government bond market. Foreigners own a third of Treasurys, down sharply since the GFC. In addition, they own 27% of US corporate bonds (that’s been flat since peaking in 2016) and 18% of US stocks (that figure’s drifted up steadily from around 10% two decades ago).
I’m quite sure the vast majority of Americans are ignorant as to what it’d mean if US Treasurys lose their luster for structural reasons. Howard Marks captured it pretty well in his latest memo. “The world’s high opinion of the US economy, rule of law and fiscal solidity has allowed us to hold a ‘golden credit card,’ where there’s no credit limit and no bill ever comes.'”
I’d quibble with the notion that “fiscal solidity” has anything to do with it, but Marks’s characterization generally works, and he used it to set up a series of questions, three of which were, “Even if we remain the world’s best credit, might other countries cut back on purchases of US Treasurys out of worry, spite or political motivation?”, “What would happen if a Treasury auction failed?” and “Will we remain the world’s best credit if the dollar comes to be less accepted as the world’s reserve currency?”
Do note: Those are different sorts of questions than people were asking in late-summer 2023, when Fitch downgraded the US and Bill Ackman was busy talking up his long bond short. We’re now asking existential questions about the possible end of the world as we’ve all known it.
The title of Reuters’ morning market wrap on Friday was “Capital flight fears sink dollar.” That’s not what you want to wake up to. “The question of a potential dollar confidence crisis has now been definitively answered: We are experiencing one in full force,” ING’s Chris Turner wrote. Cross-asset price action, he went on, has “demonstrated a radical shift away from US assets,” as the dollar, like Treasurys, is “currently acting as a risk-sensitive currency, the opposite of a safe haven.”
Bloomberg underscored the point. Investors have begun offloading 10- and 30-year Treasurys “at the very same time they frantically [sell] stocks, crypto and other risky assets,” an article published April 10 read. “In other words, a little like a risky asset themselves.” Consider this: 10-year US reals came into Friday up 43bps in five days (that’s a big move), and the dollar was lower over that stretch.
Again, there’s a very real sense in which Trump’s gambling with the end of the world. And, as I’ve emphasized over and over again these past three months, the administration’s systematic dismantling of the rule of law is even more dangerous than the tariffs in that regard.
Every day there’s some new affront to democracy and the country’s system of checks and balances. As I write these very lines, The New York Times reports, “The administration’s refusal to comply with a judge’s directive [seeking details on plans to return a wrongly-deported man] threatened to erupt into a showdown between the executive and judicial branches.”
For now, Trump says he intends to comply with Supreme Court decisions, if not decisions emanating from lower courts. But don’t be naive. That commitment isn’t any firmer than Trump’s other commitments, which is to say it’s just a matter of time before the Constitutional crisis.
And boy, oh boy: If you thought this week was rocky for Treasurys, just wait until the administration decides to ignore an unfavorable Supreme Court ruling.
At that point, markets — including the bond market — will be compelled to grapple with the so-called “science fiction” scenario which everyone on Wall Street’s spent the last decade trying desperately to downplay as too far-fetched to mention, let alone debate or discuss: The literal end of American democracy.
Unpopular opinion, but my hypothesis is that the de-dollarisation narrative has always sounded appealing to a lot of people and now when there are some signs that fit with that narrative, it’s gaining further momentum in the media. While all complaints about the breakdown of decency, democracy, rule of law etc. are true, I posit investors are way more cynical and don’t believe this storyline.
I think they’re pricing in the stagflation story hard. If nothing changes, inflation goes up, recession hits, Fed can’t cut, dollar might still weaken, imported inflation goes up, lower demand for treasuries from foreign trade partners and US investors who are battling recession and thus further increase in yields, warranting a bigger recession due to subsequent budget cuts or tax increases. If that were to happen, it wouldn’t go well.
And thus I think the bond market will already push the government to come to the same conclusion by pushing yields higher in the short term, forcing Trump to fold like wet card board to the Chinese as well. And after the Chinese, the bond market will force Trump again, but then to lower the universal tariffs from 10% to 5%.
When US retreats on China and later also on the universal ones, inflation expectations come down, Fed can cut again, dollar becomes popular again due to increased trade and lower angst for recession aaaaand we’re back.
Another fold; smartphones and other consumer electronics are exempted. The folding will continue.
Does anyone have access to the nature of the deals being made? Does Trump benefit personally from every tariff he inclicts on his citizens? What did Tim Cook offer to Donald Trump in order to get this exemption?
Well, we know what Jensen Huang did.
https://www.npr.org/2025/04/09/nx-s1-5356480/nvidia-china-ai-h20-chips-trump
I have been reading “The Power Broker”. Amazing how much things do not change.
Thank god Trump appointed Amy Coney Barrett.
I am sure everyone has seen this, but this look says it all.
https://x.com/Boatstory1/status/1897136772817281094?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1897136772817281094%7Ctwgr%5Ea37489da95f6ba061a8e4312a522efe57d8ad2eb%7Ctwcon%5Es1_c10&ref_url=https%3A%2F%2Fabovethelaw.com%2F2025%2F03%2Fthe-amy-coney-barrett-clip-that-will-have-scotus-followers-talking%2F
I think that was Pam from The Office. (Ok, maybe side-by-side Amy the Rabbit and Jenna Fischer don’t actually look alike)
Unfortunately I one of those souls who was leveraged long TLT. I took a loss on 1/2 my position at the close today, but I’m holding the other half in hopes that it isn’t the end of the world as we know (and I don’t feel fine).
It won’t be long until higher reals dent risk assets ‘bigly’. The fomc despite protestations will be easing shortly bigtime. The longer they wait, the bigger and faster they will have to ease.
Back in the mid 1980s I’d sometimes alight at King Tut’s Wah Wah Hut on Avenue A before moving across the avenue A to the Pyramid Club.
I only mention that because I have a clinging memory of a piece of graffiti in the men’s room at the Hut:
It’s the end of the world as we know it and i feel like shit.
It must have been 1987 or later, because “Document” was released in 1987.
Amusing to see the haunts of my early adulthood mentioned in such a context.
Joey is right on the timing. It was between my two overseas postings.
Tim – my #1 favorite then and earlier was Downtown Beirut on First Avenue between 9th & 10 streets. When I returned from the offshore the second time they had been forced to move to a new location. Nice, large and clean which left it devoid of character. A sad passing.
Fed’s balance sheet is “down” to $6.7T. What is the likelihood that the Fed starts buying longer dated UST’s?
Well, that depends on how things go. My guess is they were ready to step in on April 9 had that 10-year sale gone poorly. Maybe not immediately, but I imagine they were drawing up contingency plans.
I bought a CHF index fund because watching the dollar collapse seemed more fun when I benefited from it.
Seriously, WTF, how does this not end with a global financial crisis and Americans dying in combat in service to a man who hates the military?
This is the stupidest moment in modern human existence.
Well said!
Since the first six months of his first term my brain has seen DJT as the “antichrist.” Conservative religious types seem to share a certain rigid view of the end of the world as we know it. The thing is that kind of violent end is not really likely. Instead, it turns out the AC is a oversized monster with the mind of a petulant school child who is bent on a single-minded idea. Take away everything we believe to make us great and you will rule the world. So far the Congress is effectively no longer operational, one third down. The SCOTUS has been taken over and is hanging on by a thread, two thirds down. Even the administrative branch is being dismantled and sent home. The trouble is, that single-minded idea is a flop and already exposed. I read a glimmer today that said there is evidence that at least some of the guys who are supposed to collect the new tariffs from exporters, are ignoring the rules and not collecting anything. So now we get to see, can the people (that’s us) defeat the real “Great Satan” or will he win? (I’m really not crazy, just sayin’)