This week was all about bonds, and specifically US Treasurys.
Although the US long-end managed to steady into the weekend, 20 years and out USTs nevertheless notched a fourth straight weekly decline, as the bond market saw a middle finger to Moody’s in Republicans’ willingness to push Donald Trump’s tax bill through the House.
Meanwhile, the administration raised more eyebrows among those concerned about institutional erosion with a brazen decision to ban Harvard from enrolling international students, a move Larry Summers aptly described as “the stuff of tyranny.”
America’s in crazy territory now on pretty much every front, and Trump didn’t do himself any favors in the international PR department on Friday when he appeared to renege on his own 90-day tariff pause to announce a 50% levy on trade with the EU from June 1.
This isn’t the stuff AAA-rated countries are made of, and were it not for the dollar’s reserve status and Treasurys’ uniquely indispensable role in the global financial system, America would be paying through the nose to borrow right about now.
The concern, obviously, is that between Washington’s utter disregard for the market’s complaints about the US budget trajectory (and if you ask me, that blatant disregard’s far more problematic than the actual red ink, which is more or less meaningless) and Trump’s outward disdain for any sort of decorum, Treasurys will become something other than Treasurys, for lack of a better way to put it.
Remember when I said, on May 20, that the term premium was sending a warning? Well, that warning grew louder over the ensuing two days.
The figure above’s an updated version of a by-now-familiar chart. The term premium widened out beyond 90bps this week.
Blame Moody’s if you will, but anyone who tells you this is all nothing to do with Trump is also a person who’d tell you the October 2022 gilt crisis wasn’t Liz Truss’s fault. Such a person can be ignored as a fool or a shill. If I have to suffer one, I’ll gladly suffer the fool. At least a fool’s complicity is unwitting.
All of that said, I’m sympathetic to the idea that the long bond’s a buy. 5%’s an instinctual trigger for me and, I imagine, for a lot of other people too. While the US long-end isn’t as oversold as it was in late-October of 2023, it’s getting there.
“The catalysts of the 2020s’ bond bear market are now very well-documented [and] very priced in — maybe not fully, but very,” BofA’s Michael Hartnett wrote, in the latest installment of his popular weekly “Flow Show” series.
The figure above’s remarkable. The 10-year annualized return for long-term US government bonds hit a record low of -1.3% earlier this year, and it hasn’t improved much since. That, Hartnett noted, is “the same humiliating place stock returns were in during February of 2009.”
Anything above 5% on the long bond is “a great entry point,” Hartnett went on. His rationale: If you’re Trump and Scott Bessent, “losing the long-end (and the US dollar) is not a winner” and bond yields in excess of 5% are very “negative for today’s highly financialized US economy.”
Trump and Bessent blinked at a “queasy” bond market last month. They’ll probably cave again if the vigilantes push yields much beyond this week’s highs. Besides, if you can’t trust “the king of debt” to run the US Treasury, who can you trust?
Curious how Trump and Bessent could express that caving, though.
Would Trump upend his BBB progress by suddenly demanding less spending and/or more revenue? Isn’t the X date in August?
Would Trump retreat again on tariffs? More 90 day pauses?
Would Bessent do something with QRA, tilt issuance even more toward bills? I’m unclear on what the constraints on that may be.
I was just debating with a friend about the dollar. Here’s the rub: the dollar may be oversold. It may ‘bounce’ but structurally we are where we are for reasons that are not ‘bouncing.’ A tactical/technical bounce can certainly happen, but nothing is really changing to shore up confidence. At some point, the RoW will grow accustomed to the U.S. being an untrustworthy basket case and will have moved on from Pax Americana to something else that is forming out of the ashes. A Phoenix or a demon.
A dragon.
There’s talk, whispers and rumors about crypto as a reserve currency. That may be idiocy, but that puts it right in Trumps wheelhouse. Might have been Musk who was talking this week about tokenization being key to the global financial future so some kid in Africa who had $2.38 could by some Apple stock. I still can’t imagine crypto as anything other than a casino game, perhaps that makes me a big loser since I don’t have a bulging crypto wallet.
I rather like this situation. Prices down => yields up. I reinvest 25% or more of my monthly earnings in new stuff. Right now new stuff is insured/protected IG muni bonds paying 5.0-5.25% nominal interest with no imminent call features. Right now nearly half my investment earnings are tax-exempt and giving me nominal returns of 7.25% equivalent yields. At the current rates I’ll be locked in until I’m dead. Three more years of silly Donald of the very tiny hands and me and my family will be set for a long time.
The problem is that 80% of society is paying 18% to 30% for money. They are getting screwed every day by the financial system. When Bissent and Trump and others are known liars and cheats who is going to accept their plight. Not me. I wouldn’t and someone is going to knock this U.S. edifice down,