I’m pretty sanguine about the outlook for risk assets but… BUT.
At the end of a fraught week on the geopolitical front, I reminded readers that equities don’t generally care about anything that isn’t immediately relevant for corporate bottom lines.
Maybe that’s myopic, but it isn’t “dumb.” What are stocks? According to the “YOLO” mantra, they’re poker chips. However wise that mantra accidentally is in the context of humans’ ephemeral, meaningless existence, stocks aren’t poker chips. Rather, they’re claims on the assets and profits of corporations. If a given geopolitical event doesn’t threaten to impair those assets or curtail those profits, why should the value of the claims be lower?
One answer in the current environment says you have to take account of the read-across for risk-free rates from Donald Trump’s best efforts to alienate foreign buyers of US government debt. But it’s very difficult to put a number on that or to delineate a time frame — it’s akin to asking “WEN DE-DOLLARIZATION?” in crypto parlance.
And anyway, for all the Sturm und Drang, including a historic selloff in ultra-long JGBs, 10-year Treasury yields ended the week flat and are up just 5bps for the year so far. It’s the same story with real yields, and while the term premium’s “high” at ~80bps, it’s important to keep perspective. Have a look:
As the figure reminds you, negative term premia are an aberration. There’s nothing inherently “worrying” about the implication that investors want to be compensated to the tune of 75bps for the extra risk associated with locking up their money for a decade versus just rolling shorter-term paper. (In theory, the term premium shouldn’t be negative, certainly not for a country with fractious politics and large deficits.)
All of that said, Trump’s an existential risk to the Treasury market. And everything in the world’s priced, in one way or another and at the end of the day, off the US 10-year.
As Peggy Noonan put it in a January 22 Op-Ed for The Wall Street Journal, “Trump can’t tolerate peace and quiet.” Trump, she said, is “afraid of boredom” and as such “compulsively creates drama, hop[ing] his luck –and ours — will hold out.”
In the 48 hours in and around the publication of Noonan’s piece, Trump sued Jamie Dimon for $5 billion, blew up another alleged drug boat, threatened to slap a 100% tariff on all Canadian exports if Ottawa strikes a trade deal with Beijing and God only knows what else. By the time you read this, the administration will have made headline news several more times, I guarantee it.
Some of the frenetic activity’s indicative of a revived “flood the zone” strategy from Trump, but a lot of it’s just what Noonan described: An addiction to high drama. That penchant for spectacle’s commingling with Trump’s cavalier approach to foreign policy and equally heedless crackdown on domestic dissent. The end result looks like autocratic chaos at home and a superpower gone totally rogue abroad.
This is the subject of the new Monthly Letter, which I’ll publish over the next few days. I won’t front-run that piece, but the point here is to preemptively tie it to the outlook for Treasurys, which I think admits of meaningful, if still necessarily remote, catastrophe odds. Put simply: The left tail’s fat, and that’s not what you want for the world’s bedrock security.
That’s the sort of warning that’ll be dismissed as absurdist fearmongering, and rightfully so. US bills, notes and bonds are multi-purpose paper. They’re the preferred vehicle for recycled savings, they’re insurance against unwanted local currency depreciation, they’re surety for the entire constellation of collateralized global finance and, at the most basic level, they’re interest-bearing versions of the world’s reserve currency. The market for them’s infinitely deep and, in all but the most extreme circumstances, eminently liquid, certainly relative to any other market.
In short: The world needs US paper. The whole system runs on it. You can put diesel in a gas car if you want but… well, it’s not going to run very smoothly. So, when the US sells debt, the question isn’t really about demand — not in the sense of “Does anybody want or need this?” Rather, the question’s about clearing price.
But what many (most) market participants, even seasoned veterans, don’t seem to fully appreciate is the extent to which faith in US bills, notes and bonds is inextricably — definitionally, even — bound up with the tenets of liberal democracy.
Treasurys are the lifeblood of the system, but whether we’re cognizant of this or not, the system’s predicated entirely on the durability, sacrosanctity and absolute inviolability of everything Trump stands against, from the rule of law in America to the (admittedly unfulfilled) promise of multilateralism to central bank independence and indeed to democracy itself.
Can the system survive if the US isn’t committed to those principles anymore? Does it make sense to talk about a system — any system — if the linchpin no longer subscribes to the core tenets? What does it even mean to have a claim on the US government in 2026? Is that not just a claim on Trump? If so, how estimable is that claim?
Coming full circle, I’m still bullish on risk assets in the near-term despite nosebleed equity multiples, tight credit spreads and sundry bubble risk, but I do fear a bond market reckoning with what to me seems plain: The US in 2025 transitioned from a democracy to competitive authoritarianism. And if the first several weeks of 2026 are any indication, the metamorphosis might not stop there.
When the realization hits the rest of the world that a claim on the US government is ‘just a claim on Trump’ then the real trouble begins. It sure feels like Trump’s nightmare strategy is the US against the rest of the world. It’s a frightening idea for the globe and it says bucket loads about Trump that he decided to attack our allies first. This is proof alone that he’s mad. I don’t even need to see the rest of the manure show like his faltering speech, inability to hold a thought beyond 5 seconds and constant narcolepsy to know he’s gone way round the bend and won’t be coming back. Who wants to claim that if there’s any other choice.
When Trump suggested–in his first term–not paying interest on US bonds held by China, it was casually dismissed. “He just doesn’t understand how the bond market works. He’s out of his depth, but don’t worry, one of the adults in the room will patiently explain to him why you can’t do that.”
When he suggests some form of that idea in his second term (and you know he’ll do it. This is a when, not an if.), people will have to take him seriously, and then? Then things get spicy
Will no one rid us of this turbulent priest?
H-Man, right on that equities still have some leg while the day of reckoning with the long end of the TBonds is the hole card. If the bonds smell a rat, the interest pain on 10’s could start sniffing 5% and that would be the end of equities for awhile. The Fed does a pass until June and that is when rhetoric will heat up about “To Late” Powell. Meanwhile this summer is when the vigilantes may surface but no later than the fall.
A “claim on Drumpf” is as good as no claim at all.
Can t’s domestic crackdown survive a bond massacre?
I’m just now getting around to reading this, awake at 1 in the morning while awaiting snowmageddon, and boy did the administration ever make some headline news since you clicked the ‘Publish’ button.
I can name several growing weaknesses in assuming rules based risk free rates. The constant drumbeat ofthe Toddler in Chief pardoning serial conmen and fraudsters for example, should really make you uncomfortable with growing systemic corruption. I see Liz Holmes is making donations to the Ballroom now. Which banks will the Great Toddler bless and which will he seek to crush due to some imagined slight or jealousy? This morning all I am reading is the USDJPY unwinding between the sheets on this cold winter morning.
I think people should lose the ability to be shocked at how stupid this all is, that this diet of tremendous hubris, childishness, will cost the world and think to hedge ahead of time.
Options flows for the week showed quite a bit of nervousness heading into this week. FOMC, Yen carry stress and the Great Toddler announcing Powell’s replacement after the Powell’s presser will be very interesting.
It’s as simple as organized crime extortion via the protection racket. Trump isn’t playing 3d chess, he’s playing Al Capone. Gold is now perfectly correlated with Trump’s Truth Social posts.
Deck Chairs Anyone!
I think everyone underestimates RoW’s ability to make US financial markets ‘uncomfortable’. Debate about falling $ seems to have no end, but is quite simple. Global trade is in $, if trade declines, theres less demand for $. Slightly more exports and dramatically less imports, IS less global trade, esp for the US. Foreign purchases of US stocks were down 33% from 2024. Given US does not save remotely as much as RoW, the less flow to the US, as we have seen results inmassive US underperformance. I’d guess that a significant amount of flows by US investors is created out of debt, margin etc. Djt’s policies and rhetoric has not changed. why would these financial trends change?
Also my bet is he changes from bad cop to maybe not so bad cop this summer, in an effort to change approval ratings going into midterms.