New week, same concerns.
The bear steepener was back in the Treasury curve, the dollar was lower, China hit back at Donald Trump’s accusations of trade deal violations and Ukrainian drones swarmed Russian airfields, wreaking havoc and setting planes ablaze including, by appearances anyway, a handful of Vladimir Putin’s nuclear-capable, long-range bombers.
What can you say? Another day in paradise. And I didn’t even mention the really bad stuff. Like the situation in Gaza. Or Yemen. Or Sudan.
On the bear steepener — which, I can only assume, no one in Gaza, Yemen or Sudan is especially concerned about — Scott Bessent’s back in Baghdad Bob territory. He keeps insisting, often on television, there’s not a problem, but there clearly is.
It’s not that things are worsening in terms of absolute yield levels (we’re still off the YTD highs). Rather, it’s the persistence of the narrative and the associated angst. Those two things — the narrative and the apprehension — are feeding on one another.
Bloomberg on Monday ran a story called “Buyers’ Strike Rocks US Long Bond as DoubleLine, Pimco Stay Away.” Are you going to buy the long bond when Pimco and DoubleLine are avoiding it? I mean, maybe. Maybe those sorts of headlines are a contrarian indicator. But if you’re Bessent, the only thing worse than waking up to Pimco and DoubleLine bad-mouthing the long bond is waking up to @realDonaldTrump hiking China tariffs to 250% out of the blue. (“Thank you for your attention to this matter.”)
The 5s30s was out to 100bps on Monday for the first time in years, a reflection of the behavior outlined in the linked Bloomberg piece, which quoted Pimco’s Mohit Mittal. “If there’s a bond-market rally, in our view it’ll be led by the five- to 10-year point,” not the long bond, he said.
I want to emphasize: The fiscal situation isn’t that much worse in America now than it was a few months ago if it’s any worse at all. Yes, the GOP tax bill’s basically written in red ink, but everyone knew that was coming. What’s changed is the perception of America the country, which in turn impacted perceptions of America the credit.
You’re encouraged to read the latest Weekly for more on that, but suffice to say — and I’m quoting from the Weekly — “fiscal fundamentals matter more when investors have reason to suspect the most basic underlying assumptions about American democracy can no longer be taken for granted.”
Some market participants will tell you that doesn’t have anything to do with it. They’re wrong. I’m obviously not suggesting any one session’s trade in Treasurys is about democratic backsliding. What I’m saying is that when your fiscal fundamentals are sh-t in the eyes of the market, you don’t do yourself any favors by being rude to foreign investors, nor by taking steps domestically which call into question your government’s commitment to respecting the rule of law.
The specter of a tax on Treasurys held by foreign investors is yet another example of the Trump administration’s willingness to change the rules and/or adopt different rules for different groups of people. Sure, it’s necessary to change the rules from time to time. That’s what the legislative process is for, after all. But the provision in the tax bill that opens the door to punitive levies on investors hailing from “discriminatory” foreign nations arguably constitutes rule-of-law erosion when considered in the context of Trump’s broader program, particularly if the administration has wide latitude to define “discriminatory.”
As the figure below shows, the long-end’s the only point on the curve that’s handed investors a loss so far in 2025.
There’s now some speculation that Bessent will have to tip a rethink of long bond auction sizes at some point à la Japan late last month. But that just means shifting issuance to another point on the curve, which is fine I guess but… well, it’d be better if there weren’t a buyers’ strike for the long bond, let’s just say that.
Consider also that income from the tariffs — and never forget that income comes out of the pockets of US importers and US consumers — may end up being materially lower than Trump thought given the infeasibility of sustaining massive levies on important trade partners and legal challenges. That revenue stream’s also going to be unreliable and erratic, commensurate with the demeanor of the man pulling the strings.
That, in turn, means it’ll be difficult for markets to discern whether and to what extent tariff revenue in fact offsets some of the red ink from the tax bill. Even if it does, you’re robbing Peter to pay Paul: Implementing a de facto consumption tax hike to pay for income tax cuts. It’s circular, silly and has no hope whatever of catalyzing meaningful re-industrialization.
Meanwhile, the dollar continues to leak lower. On Monday, both the DXY and the BBDXY loitered near the lowest levels since March of 2022. We’re told, by administration apologists, that’s not indicative of capital flight and/or an aversion to USD assets but it ain’t Fed policy (which isn’t dovish). And it ain’t rate diffs. And notwithstanding the “false optic” Q1 GDP contraction, it ain’t the economy either.
Here again, I’m compelled to suggest the idea of taxing foreign capital deployed in US assets is a bad one.
“Even if the application is relatively narrow, such a tool would exacerbate concerns about risks of US investments at a time when investors are already seek[ing] greater diversification away from USD assets,” Goldman’s Kamakshya Trivedi remarked.
ING’s Chris Turner echoed that. “Another factor that may be keeping the dollar soft is the threat of a ‘revenge tax’, which is currently in Trump’s tax bill,” he wrote Monday, calling the provision one more reason for foreigners to “potential[ly] divest US assets.”
It’s hard for me to understand how anyone, regardless of political persuasion, can describe this — all of this — as somehow desirable or good policy. “Move fast and break things” might be a good way to go about innovating at an early-stage tech unicorn, but I’m not sure it’s the best way to run the US government.
https://www.wsj.com/opinion/wall-street-stages-a-weird-tax-bill-freakout-35a4f6fe?mod=hp_opin_pos_1
The Wall Street Journal writes that there is an exception for treasuries. Quoting the relevant paragraph.
“Nor is the provision a backdoor attempt to impose a new withholding tax on foreign stockpiles of U.S. Treasury debt. Some economists in Mr. Trump’s orbit have flirted with such a tax as, they think, a way to reduce America’s trade deficit. It’s a terrible idea.
It’s also not in the bill. The Budget Committee’s report specifies that Section 899 preserves the portfolio-interest exemption that excludes from U.S. taxation the income that foreign investors earn on Treasurys and other American debt. Only taxes that the U.S. currently imposes on foreigners can have the retaliatory surcharge added. Love the One Big Beautiful Bill or hate it, you should at least know what’s in it before you decide.”
I wouldn’t necessarily assume the Journal‘s Editorial Board has done the leg work necessary here, where that means sitting down with a team of people accustomed to parsing the legalese in legislation for every conceivable interpretation.
The implication from that Editorial is that the portfolio interest exemption means no foreign investors would see a de facto surcharge on their UST holdings regardless of whether those investors are deemed “applicable persons” under the bill. Maybe that’s true, maybe it isn’t, but it seems a bit odd that of all the people who’ve parsed that section of the bill since last week, only the Journal was willing to make such a sweeping claim, or sweeping suggestion.
I think the better way for the Journal to make the (exact same) point would be to say, as I alluded to over the weekend, that ultimately USTs will be exempted one way or another, whether via the portfolio interest exemption, or some even more specific language that gets inserted by the Senate now that the mainstream media and Wall Street have made such a big deal of this.
Also, it’s a bit rich for the Journal to write “love the One Big Beautiful Bill or hate it, you should at least know what’s in it before you decide.” As if the Editorial Board has read every word of that bill. It’s 1,000 pages. So, I agree with the Journal‘s assessment re: you shouldn’t criticize something unless you know what’s in it. But I don’t think they know what’s in it either. They may know what’s in that part of it (or maybe not, as alluded to in my other comment), but I don’t think the Journal wants to start throwing stones from that particular glass house. The number of people who read every word in every piece of legislation is vanishingly small, and I doubt any of them work at the Journal.
https://www.mayerbrown.com/en/insights/publications/2025/05/us-house-passes-bill-targeting-unfair-foreign-taxes
Details here. Not enough coffee to wade through it yet.
You’ve talked about how everything effectively revolves around the mad king at length and here we are: another Monday where there really is no other story than what Trump is doing or his take on current events. Even when I try to think of something relevant or interesting to add, it all comes back to Trump. How can anything else compete with a president who thinks his predecessor was executed and replaced by a robot?
To be clear, this isn’t aimed at you as I continue to be impressed at your ability to keep the conversation going despite the circumstances. This is just me shouting into the wind and hoping for a day where our politicians are boring again and a scandal is a scandal.
It all comes back to the guy who thinks orange makeup makes him look good, although I’ve never heard anyone else, MAGA or not, agree with that. I mean, has nobody in his camp ever said to him that looking like you have a tan is not a bad idea but you really ought to change the shade. This can’t be the person any sane country puts in charge of anything. It also demonstrates that Trump will never change is mind on anything. Apparently from the White House itself, we’ve learned that Trump doesn’t read (not a surprise) and that they are considering making the president’s daily briefing a Fox type news show.
Re WSJ – fair points, H.
Yeah, and read the following from Joe and Tracy (at BBG):
“[S]ome analysts are playing down the whole Section 899 saga. In the case of Treasuries specifically, they point to carve-outs under the existing Portfolio Interest Exemption (PIE), which, under certain circumstances, exempts bonds where the foreign investor owns less than 10% of the voting power of the issuer. That would probably mean trillions of dollars in both US Treasuries and corporate debt held by foreign investors could escape the tax. [But] that raises the question of why bother with Section 899 in the first place if you’re only going to simultaneously exempt a majority of US bond holdings? As Michael McNair put it yesterday: ‘Congress wouldn’t draft a ‘retaliatory surtax’ that raises only a few billion unless they expected the portfolio interest base to re-enter the tax net.’ Section 899 only really makes sense, he argues, if PIE is simultaneously repealed.”
There’s the nuance.
Interesting, I guess I was asking for too much, thinking they would play it straight.
No, I mean you’re right to point it out. And the House Ways and Means Committee spokesman reiterated today it wouldn’t cover portfolio interest, but I just think there’s too much interpretational leeway here, and I think it’s dangerous to hand Trump that leeway. I think if they’re going to pass a version of the bill with that discriminatory tax provision in it, the Senate needs to add language that’s ironclad-specific that it doesn’t and can’t, under any circumstances, apply to portfolio interest.
Maybe I’ll try this strategy next time I need a loan for something. I’ll tell all prospective lenders that I’ll be charging them a fee should they decide to let me barrow from them. I’m sure they’ll be jumping at the opportunity.
Sadly, there are few sources of news to trust any longer. I first subscribed to WSJ in 1967 and have been a continuous reader until three months ago. For three straight days I faced articles that were provably trash and propaganda from MAGA and I quit. Haven’t missed it too much. I do read the NYT and find little of actual value. I’ve been thinking of the Financial Times but I’m not convinced it will inform me sufficiently. I’m willing to be convinced of any trustworthy alternatives. TV news offers nothing. Anywhere.
I have always assumed this is a proper source.
ever since Murdoch’s News Corp purchased the WSJ I knew it would gradually and suddenly lose its credibility…
In his collection of media criticism, “The Press”, the great A.J. Liebling proposed a daily paper that would collect, parse, compare, sift, and distill the previous day’s stories from New York’s several daily papers of his time. He posited that by filtering each paper’s editorial biases and assembling the bits of fact in their respective versions of the story, the perspicacious reader could actually get the complete and unvarnished picture.
Alas Liebling is all but forgotten today, but his insight remains as golden as the light on Napoleon’s Tomb, to use an image from another of his works.
Read WSJ, BBG, FT, Economist, and the foreign media of your choice – SMCP or Caixin aren’t bad for China – and a reliable enough story can usually be mosiac’ed together.
For just one source, I probably would pick Bloomberg.
I have been reading the London Times recently. Another Murdoch center right paper, but better writing and investigative journalism (my opinion) than the WSJ.
Plus, Jeremy Clarkson is a regular contributor on random and often hilarious subjects.
+1