The volatility in the bond market is extreme. The term premium—the extra return investors require to hold long notes over short ones—is at a level last seen in September 2014 according to the Federal Reserve Bank of NY.
The 10-year Treasury is currently yielding around 4.39%, about 40 bps lower than its apex reached in January however the yield surged about 50 bps last week with prices falling the most in a week since 2001 according to Bloomberg.
There are real fundamental concerns that drove yields higher, chief amongst them is the massive federal debt that is continuing to grow at an unsustainable rate, the leverage within the Treasury market including the very popular carry trade that has at times caused significant market dislocations, to the massive amount of debt (about $9 trillion) that must be rolled over during the next 12 months.
Some are suggesting there has been foreign selling of Treasuries. To date, according to the Treasury Department and Federal Reserve, there is no evidence of foreign governments selling US Treasuries.
There are perhaps other long-term issues occurring beneath the surface, chief amongst them is how the US had weaponized the international payment system forcing Russia to default on its debt. Even though the US dollar still commands a massive amount of foreign reserves, the growth of foreign reserves in other than the dollar has grown exponentially since 2021.
Most believe the US will not lose its coveted currency reserve status, the rise of competitors is a potential source of concern.
Some have declaratively stated the trade war/tariffs have caused increased competition for the dollar as the primary reserve currency. Again, according to both the Fed and the Treasury Department, there is no evidence to support this view.
As stated, the move to other potential reserve currencies commenced about four years ago and has accelerated because the insatiable demand for monies by the US government.
The world is and has dramatically changed. The resurgence of economic nationalism commenced about 10-12 years ago and is accelerating. Tomorrow will be different; the question however is how. Volumes will be written, and libraries will be filled but only history will answer the questions.
Commenting on yesterday’s market action, stocks again got whipsawed on trade headlines. Markets generally ignored better than expected results from the mega sized banks, results that indicated strong and healthy consumers and businesses. That was then…what about now? To date, only fear over the endless possibilities of tomorrow.
Treasuries advanced as Treasury officials dismissed speculation that foreign nations were dumping their holdings.
Last night the foreign markets were down. London was down 0.27%, Paris down 0.52% and Frankfurt down 0.46%. China was up 0.26%, Japan down 1.01% and Hang Seng down 1.91%.
Dow and NASDAQ futures are flat and down 1.5% and NVDA warned that it will take a $5.5 billion charge relating to a licensing fee for exports to China. Moreover, Dutch chipmaker ASML issued a disappointing profit report. Shares of both companies are down over 8% premarket.
The 10-year is up 1/32 to yield 4.33%. FRB Chair Powell speaks today. Will he comment about the bond market?
