This week’s Treasury refunding auctions garnered a lot of attention for obvious reasons.
The macro-market debate du jour revolves around the increasingly consensus notion that global demand for USD assets is waning in the presence of hopelessly unpredictable US trade policy. (One astute reader last week dubbed Donald Trump “Captain Capricious.”)
Confining the critique to trade is to adopt the euphemistic formulation. Some worry international investors’ inclination to pivot from the dollar is also tied to the perception that the Trump administration’s apathetic, at best, to the geopolitical plight of America’s traditional allies and at worst prepared to throw America’s lot in with the world’s autocracies.
And all of that’s to say nothing of the most existential concern of them all: That democracy’s already dead in America, even if no one’s willing to concede as much just yet.
Suffice to say the stakes are high, and one barometer of faith in America is auction demand. With that in mind, it was nice to see solid metrics for the 10-year sale on Tuesday. Non-dealer bidding for the new benchmark security was 91.1%, well above the six-refunding average. Indirects took more than 71% of the sale, which boasted a 1.2bps stop-through. Dealers were left with just 8.9%.
So, no buyers’ strike, apparently. Not in the primary market. Not today. Not yet.
But it strikes me that most market participants are insufficiently apprised of the “one way or another” nature of what Trump’s set in motion. The simplest way to communicate the point is to note that without trade surpluses with the US, other countries don’t have “excess” dollar receipts that need parking in Treasurys (or US corporate bonds or US equities). That means less demand.
There are a variety of other, related, ways in which Trump’s bid to rewire the system will result in diminished demand for USD assets and/or USD-selling (outright or de facto). I’ll point, again, to what happened in Taiwan on Friday and Monday as an early example.
If you haven’t read “Neon Swan: What Just Happened In Taiwan?” and “Taiwan As The Blueprint,” you should. I won’t subject those of you who have to a belabored retelling. But I did want to highlight the figure below, from Deutsche Bank, which suggests big outflows from Taiwan-domiciled US bond funds on Monday.
I present that “as is,” so to speak, which is just to say I haven’t done the leg work to recreate the chart. Even if I did (it entails plotting flows data from hundreds of foreign-domiciled ETFs investing in US bonds, theoretically possible on the terminal), Monday’s holiday might’ve muddied the waters. So, I’m not necessarily vouching for the veracity of the chart’s implication but… well, assuming I’m not missing something, it speaks for itself, with a few caveats.
As noted, a lot of the ETFs in the universe of 400 funds Deutsche Bank’s using to track portfolio flows didn’t report for Monday because it was a holiday in a lot of locales. But, Deutsche wrote, “of those that did, funds domiciled in Taiwan reported very large selling of US fixed income ETFs.”
That selling coincided, of course, with the largest two-session rally in the Taiwan dollar ever, and if you ask Deutsche’s emerging markets team, it’s consistent with “early signs of a repatriation of USD-based assets from Asian currencies.”
In the same short note, the bank’s George Saravelos cautioned on the domino effect I documented in the two linked articles above — namely, the risk of outsized bilateral exchange rate appreciation in locales where large investors (not to mention corporate treasurers) are caught flat-footed with enormous unhedged or under-hedged USD exposure.
“The extreme volatility seen in Taiwan FX over the last few days [is] a warning shot to the self-fulfilling moves that could happen to other currencies where the institutional investor industry is left with a large overhang of unhedged USD asset positions,” Saravelos wrote, driving home the point. “The JPY immediately comes to mind.”
Our Dear Leader may well be required to dust off his previous pieces which explained the mechanics of the FX carry trades.
Recently we’ve enjoyed a taste of what we may enjoy thanks to the brief panic over the bond basis trade in the US. Why not add a FX carry trade unwind to the mix?
That said, we’re told that the financial players now have strong risk control measures in place so we need more deregulation to remove existing leverage caps.
Oooof. A combination of April 2025 w/ August 2024? Have some vol blowups like Feb 2018 which might lead to some institutional crisis with March 2023 vibes and then some black, mechanical, death loop spiral resembling 1987 and COVID mixed together.
After ‘liberation day’ I found myself knowing what to do, but was frozen in the headlights because I’ve never had to do it before and it can be very complicated. I knew I needed to diversify my 100% dollar exposure and looked for cusips that would work for a non-professional. I found a few fx ETFs, looked at eurusd options, and thought to myself, just buy em (sell em in the options!) But Jack Bogle stuck in my middle-class brain kept saying, “There’s no better investment than the American stock market.” And I did nothing but watch my dollar based portfolio stealthily lose over 5%. I have no flesh-and-blood friends I can talk about this stuff with and Discord is too full of opinions anyway and CFAs are always buy-the-dippers. I’m on my own, but I do hear your bugle of warnings. Much thanks.
And that’s where we are right now. How can anyone know what to do when the ground is constantly moving under our feet? Suppose you were to pull from some of your U.S. holdings and invest in a Japanese or European stock. There’s no telling what their eventual trade deals will look like, and you could lose money on both the stock and the exchanged currency. Do we actually need to hedge our savings accounts now? I am very uneasy over the thought of shorting the U.S. dollar, or diversifying into what are normally weaker currencies.
Since 2008, doing nothing and riding out the squalls has proven to be the right approach.
A few of us here, like Gerard Jones and John Taylor, were in the markets when that was definitely an expensive approach
So our viewpoints can be colored by that experience which could prove counterproductive. But this time may be different….
This will be my fifth bear market. I’ve never regretted holding plenty cash in such markets, and cash that pays 4% is even better. There has never been a need to consider what cash – USD cash or EUR cash or CHF cash – but it feels like a sensible question now. Still, I think the decision of “what cash” is much less important than the questions of “when cash” and “how much cash”.
. Still, I think the decision of “what cash” is much less important than the questions of “when cash” and “how much cash”.
Mind if I steal this? It’s such a great quip.
I think the H has been pretty consistent in if you don’t know what to do then just buy SPY and forget about it. Don’t know if he still maintains that. To me it has always seemed rational to have significant international and foreign currency exposure from a diversification perspective as your income represents a fixed-income security in your home currency and potentially tied to your home country’s economy, as opposed to investing in home country which most investing middle class seems to do. This is more problematic for US investors as other developed market assets have performed worse than US but still are correlated in downturns.
…where “income” refers to work income and assuming it is a significant proportion of your total income.
Some of old folks have no “work income.” I haven’t received a W-2 since 2007. I have life annuities (SS, 3 from my 403(b)s, and two from my IRAs. Everything else is portfolio income. The annuities are better than my last paycheck but the rest requires regular attention.
Yes pardon — the diversify nonfinancial risks idea makes sense this way if you are an early to mid career professional whose salary or similar can be reasonably described as bond-like (so most jobs, but not necessarily eg real estate), human capital is a significant proportion of your total wealth, the goal is wealth maximization and the investment horizon is long. If you for example need the income to pay the bills then you probably specifically don’t want eg fx volatility.
Pyrogenesis – you are right. We – and most of the world are set on a dollar basis – and it is gone. The dollar overhang is many trillions and unwinding it will be a disaster. We can’t do it without destroying the world order. Trump and Bessent have to go. (We don’t have to do this, just accept reality) Simple, yeah! No. My whole life has been offshore – i.e. .successful when the dollar is in the tank, but Trump has way overdone it. The safe way is to sell everything U.S. before Trump makes it illegal. I am not crazy – Nixon did it. The U.K. did too.
Do you really believe that the famed patriotic economist Peter Navarro would allow something like payment controls be imposed?
I’m not sure there’s much to do about deer in the headlights syndrome at this point. What in the domestic and global financial system isn’t at risk now. Everything is being knocked off its axis at this point, much as it was during covid. No telling where things will rupture, but certainly they are and will.
https://www.newsweek.com/uae-seeks-ai-deal-after-investing-trump-linked-crypto-2067556
This is literally the definition of a kleptocracy, no?
I think this is at the heart of what Trump and his family are all about and he’s being “let in on” filthy riches. I wish I knew the end-game but it seems like a replacement of the USD and traditional finance on a global scale. Replacing our current Ponzi scheme with another, and new players with much different objectives than the US of the last 80 years.