Just Like Haven(?)

“The bond market right now is beautiful. I saw last night where people were getting a little queasy.” – President Donald Trump

Chart of the Day

Good morning!

If not for Treasurys, what else would we have? 

Treasury yields are a legitimate proxy for the risk-free rate, and their liquidity and perceived safety can be seen in the pristine credit rating of U.S. sovereign debt. Treasury yields thus form the foundation for numerous valuation and business models used in investment and corporate decisions throughout the economy. It also underpins the interest rate borrowers pay on everything from mortgages to student loans to consumer loans. Any lasting change to the assumption that Treasury yields are, for all practical purposes, risk-free, would therefore impact and likely force every economic, business, and investment decision to be reconsidered.

Three times in the past decade and a half, the U.S. sovereign credit rating has been put on watch or else outright downgraded. Each time, a chorus of pros on Wall Street have dismissed the opinions expressed by Standard & Poor’s (2011), Fitch (2023), and Moody’s (2023). Some denied any significance to the rating, noting that the credit-rating agencies were only pointing out risks that the market had already priced in through day-to-day trading and thus should not be a source of additional concern. Other critics asked: Where else are the world’s investors going to turn when they’re seeking a safe haven, if not in Treasuries (and also to some extent, the almighty U.S. dollar)? 

The answer to that question has always been: nowhere else. That’s why short-term Treasury rates have continued to be used as a proxy for risk-free rates and the dollar is still largely judged as the safest refuge in times of risk and turmoil.

But with inflation concerns still lingering, the latest turmoil in global markets sparked by President Donald Trump’s tariff campaign and recent developments in geopolitics appear to have some questioning whether it still is. At least, that’s the interpretation many are attaching to the recent selloff in Treasuries that has caused long- and short-term yields to climb. (There are plenty of other possible explanations, to be sure.) It is unusual that the price of bonds from other countries like Germany are rising during a time of uncertainty. Similar movement was seen in shorter-term government bonds from France, Italy, and the United Kingdom. To be sure, U.S. yields are generally still below levels seen in January around Inauguration Day, and they have spiked before without causing anyone to question the U.S. status as the world’s refuge from risk. Especially given yesterday’s 10-year auction showing stronger-than-expected demand and a rally in bonds after Trump’s announcement yesterday, most would still say such questions are premature, if not downright silly. 

The fact that the speculation even arose in the first place is nevertheless noteworthy. KBRA’s Ken Egan told CNBC that “one factor people are speculating about on Treasuries is around the ongoing theme of a move away from the U.S. dollar, of it becoming less trusted,” while Henry Allen linked the selloff to “evidence that [Treasuries are] losing their traditional haven status.” Citigroup strategist Ben Wiltshire similarly suggested that “the UST selloff may be signaling a regime shift whereby US Treasuries are no longer the global fixed-income safe haven in periods of risk-off.”

Yet perhaps there’s a way to look at this dovishly. When U.S. short-term yields surged during the Covid-19 panic (leading to similar speculation about U.S. safe-haven status), the Federal Reserve stepped in with two significant rate cuts at emergency meetings, with Fed Chair Jerome Powell citing “evolving risks to economic activity.” The cuts are widely seen as having contributed to a strong subsequent stock rebound.

Yesterday, minutes from the March 19 Federal Open Markets Committee (FOMC) were released. They showed increasing concern by Fed staff about tariffs, with some concerned that the tariff increases might be “larger and broader than many of their business contacts had expected.” Yet, in keeping with recent Fedspeak, the minutes suggested that officials remain patient enough to await clarity on how Trump’s actions might resolve. 

The U.S. supremacy regime may continue yet, but perhaps the threats to it can no longer be dismissed out of hand.

Share your thoughts

Are U.S. Treasuries and the U.S. dollar still the automatic safe havens they have been since Bretton Woods? Click here to send us your response.

Here’s what a reader commented

Question: What economic risks, if any, do you think reduced government funding of basic research will have on the U.S. and the world?

Answer: Thank you for this very important observation and perspective. The Federal government employed thousands of selfless and dedicated scientists and experts in many fields to the great benefit of Americans and mankind more broadly. It is simply wrong that a single election can result in a generational loss of this American brainpower in less than 90 days. To compound the tragedy, our scientific leadership may be gone forever.

Catch up with FS Insight

Wednesday marked an obvious meaningful turn as the 90-day delay in the reciprocal tariffs firmly puts the U.S. back on a positive path. There are multiple positive developments and these are coming at a time when I was frankly becoming quite nervous about the risk of a recession.

Technical

Trump’s tariff retreat coincided with record drops in the VIX along with a record number of points gained for DJIA on Wednesday. After yesterday, it’s likely, at a minimum, that market breadth has bottomed, and there is an increasing likelihood that Stock indices have made a low of importance.

Crypto

While we are not completely “out of the woods,” yesterday’s development sets up crypto success over the next one to two months. We would look for a breakout or retrace to add risk to our Core Strategy.

News We’re Following

Breaking News

• Inflation rate eases to 2.4% in March, lower than expected CNBC
• Asia markets soar after President Trump pauses global tariffs NPR

Markets and economy

• Why Trump blinked on tariffs just hours after they went into effect WSJ 
• E.U. pauses new tariffs on U.S. goods after Trump backs down NYT 
• Gold prices extend gains as U.S.-China trade war escalates CNBC 

Business

• Former Facebook executive tells Senate committee company undermined US national security with China AP
• Prada deal for Versace at risk of collapsing with market in turmoil WSJ 

Politics

• Behind Trump’s tariff pause: A quiet Republican lobbying campaign SEM
• GOP holdouts force delay in vote on Trump budget plan WSJ 
• FDA reverses course on telework after layoffs and resignations threaten basic operations AP
• Trump administration’s El Salvador deportations hit by new legal challenges WSJ 

Overseas

• China leaders to meet on stimulus after Trump’s tariff shock BBG 

Of Interest 

• They went to the Masters. They ditched their cellphones. Then the markets went completely crazy WSJ 
• Largest mammalian brain map ever could unpick what makes us human NS