Whither Treasury Yields?

Since I am allegedly writing about the intersection of the bond market and economics, I need to periodically check in with what is happening in the bond market itself. (Since I am not plugging financial forecasts, I do not have the pressing need to point out how brilliant my calls are — or why the markets are wrong — which is a constant source for articles for most other commentators.)

USD No Longer A Reserve Currency (And Why That Doesn't Matter)

There are two potential definitions of “reserve currency.” The first is quantitative and weak: do other countries hold official foreign exchange reserves in that currency? The second is qualitative and stronger: is the currency at the centre of global financial markets while other countries peg their currency to the reserve currency, necessitating large holdings of official reserves? That is, the stronger definition implies that the reserve status affects economic behaviour beyond a basic fixed income portfolio allocation decision.

Yes Virginia, There Is A Trade War

I continued my record of being an equity market contrary indicator by finishing my last piece with a deeply gloomy discussion of equities that was published hours before a top ten positive U.S. equity daily return close. The alleged logic that was pushed by some commentators was that the trade war was “paused.” (I lean towards the explanation that bear markets are violent — the top ten up days mainly occurred in major bear markets.) Since then, with tariffs between China and the U.S. on both sides over 100%, I think it is safe to say that the trade war is still on.

Sigh, Chaos Continues (11)

Rates markets are starting to act unmoored, with long end Treasury and gilt yields rising. I am not in any position to offer an insider’s view of what is happening now, but I will just offer my impressions based on historical experience.

At the time of writing, China retaliated to the 104% American tariffs with a 84% tariff, and the EU is heading for a vote on their retaliation. At the same time, the White House administration is digging in and showing no visible interest in finding an off ramp. The American-Chinese tariffs have moved into the range where we are in a de facto embargo situation instead of merely a trade war. Supply chains are going to break rapidly, and will unravel long before the results show up in lagging economic data. At the same time, it is unclear that Trump will allow negative economic data to be printed — the truth is the first casualty of war.

It's Not A Real Financial Crisis Until Credit Cracks

I was hoping to relax after my visit to Rome, but the equity markets are currently in free during the Sunday night futures sessions. At the time of writing, the main U.S. equity markets are down 15% or so over three trading days (including Sunday). Although this is certainly an eye-opener, this is not yet a financial crisis. (We are in an economic crisis thanks the White House brain trust, of course.) 

Sigh, Chaos Continues (10)

The latest salvo in Trump’s tariff policy hit yesterday, apparently leaving only the reciprocal tariffs for the big April 2nd “Liberation Day” announcement. (I will remind readers that I will be away next week, and so I will probably miss writing about “Liberation Day” in a timely fashion. We will probably be on the following wave of retaliatory tariffs by the time I get back.)

Sigh, Chaos Continues (9)

Trump is hyping up April 2nd as “(Tariff) Liberation Day,” and it seems foolish to discuss the state of economy until we find out how extensive those tariffs are. I will be travelling for the week around “Liberation Day” so I will not be able to pipe in with my predictions of doom until quite late.

The only interesting new angle is that the Prime Minister United Kingdom looks to be angling to align himself with Trump. Although that is certainly quite the choice for a centre-left politician, it is not clear how viable that is with the unravelling of NATO and a more assertive EU.