Safe Havens No More: U.S Bonds and the Dollar?

By the Curmudgeon

Introduction:

It’s important to understand that yields on U.S. 10-year Treasury notes determine borrowing costs for everything from the $12.6 trillion U.S. mortgage market to $5.8 trillion in bank lending to businesses as well as the ever-increasing U.S. Treasury Department's own interest bills. Significantly, U.S. government bills continue to increase geometrically due to huge budget deficits and mounting interest on the entire national debt.

Trump and Bessent Focused on 10-year U.S. Treasury - Really???

On February 6^th, U.S. Treasury Secretary Scott Bessent told Fox Business "The president wants lower interest rates and ... in my talks with him, he and I are focused on the 10-year Treasury. He believes that if we ... deregulate the economy, if we get this tax bill done, if we get energy down, then rates will take care of themselves, and the dollar will take care of itself."

Major U -Turn in U.S. 10 and 30-Year Rates Last Week:

Last week was a golden opportunity for the U.S. 10-year yield to drop significantly. Instead, it leaped ~58 basis points week-over-week (from ~4% on Friday April 4^th to 4.58% on April 11^th ). -->That was the biggest rise in U.S. 10-year yields since 2001, according to Bloomberg data!

Fixed income and futures traders said poor liquidity — the ease with which investors can buy and sell Treasuries without moving prices — was exacerbating market moves.

Analysts at JP Morgan said market depth, a measure of the market’s ability to absorb large trades without significant shifts in price, had significantly worsened this week, meaning even small trades were moving yields significantly. 

The head of U.S. Treasury trading at a major U.S. bond manager said liquidity was “not great today” (incredible understatement) and explained that “market depth was running 80% below normal averages” on Friday.

What a conundrum as economic statistics were all very bullish for bonds:

· U.S. CPI and PPI readings for March came in way below expectations and probably clears the path for the Fed to cut rates, possibly as soon as next month.

· The CPI fell to 2.4% in March, which was below both February’s reading of 2.8 per cent and the 2.5% forecast by economists polled by Bloomberg.

· The PPI fell 0.4% last month from February, the Bureau of Labor Statistics (BLS) said on Friday, much lower than economists’ expectations of an 0.2%. On a yearly basis, the PPI slowed to 2.7%, from 3.2% in February. Economists had expected a 3.3 per cent increase.

· The annualized headline inflation rate is down to 2.4% and the core rate fell to 2.8%, the first time it’s been below 3% in four years.

· The University of Michigan’s consumer sentiment index fell to a preliminary reading of 50.8 in April, the fourth straight monthly drop. Economists had forecasted a much smaller decrease to 54.5 from 57 in March.

· Economists have ratcheted down U.S. GDP growth expectations, while many investment banks (like JP Morgan Chase) say there’s a 60% chance of recession this year. Slower economic growth reduces credit demand.

· The current unemployment rate is 4.2% and poised to rise. The tech sector shed 29,000 jobs in March. According to CompTIA, a nonprofit information technology association that analyzes data from the U.S. Bureau of Labor Statistics, the downturn was expected as ongoing global tariff disputes and economic uncertainty have created a challenging hiring environment for the tech industry.

It seems very likely that China and Japan were successful in driving U.S. rates higher by dumping Treasuries on the market starting early Monday morning. That’s despite stock prices diving lower that day. It was surely the key data point that caused Trump to pause tariffs for 90-days on all countries except China.

It’s hard to say if China has the upper hand now in trade negotiations, but they could further disrupt already strained global financial markets by selling more U.S. notes and bonds.

Bottom Line: U.S. Treasury debt’s safe haven status is being upended as investors around the world question the stability of U.S. markets.

Quotes on U.S. Treasury Securities:

“There is real pressure across the globe to sell Treasuries and corporate bonds if you are a foreign holder,” said Peter Tchir, head of US macro strategy at Academy Securities. “There is a real global concern that they don’t know where Trump is going.”

“We are concerned because the movements you see point to something else other than a normal sell-off,” said a European bank executive in prime services, a division that facilitates leveraged trading for firms including proprietary traders and hedge funds. “They point to a complete loss of faith in the strongest bond market in the world.”

“Long-end U.S. rates are on a mushroom trip, and there’s no interrupting that with any economics right now." said Ed Al-Hussainy at Columbia Threadneedle Investments.

“If a stiff breeze blew through the Treasury market today, rates would move a quarter point,” added Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott.

Barclays’ Ajay Rajadhyaksha title notes: “This is not normal. Bond markets are in trouble.”

The key questions are around the indirect damage done through generating extreme uncertainty around the policy and economic outlook, the ongoing dislocations in the US Treasury market and, ultimately, undermining confidence in US institutions and asset markets. It is too soon to say what the longer-term effects of the past ten days’ turmoil will be, and there is still time for damage limitation by policymakers. But, in our view, it is no longer hyperbole to say that the dollar’s reserve status and broader dominant role is at least somewhat in question, even if the inertia and network effects that have kept the dollar on top for decades are not going away any time soon and our base case is that it will recover to some degree.

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U.S. Dollar Suffers Huge Decline:

Friday’s Treasury volatility was accompanied by a big drop in the dollar. A gauge of the U.S. currency’s strength against major peers fell as much as 1.8% on Friday. UK Pound Sterling, the Japanese yen and the Swiss franc all made significant gains.

Obviously, the U.S. dollar is weakening due to Trump’s tariff turmoil and flip-flops which create uncertainty and chaos. Instead of being the usual safe haven in times of financial stress and great uncertainty, the dollar is becoming the currency to sell. That could be the shotgun start for a much broader shift of capital away from the US, according to Wellington Management, which manages more than $1tn in client assets.

“From a global investor perspective, such a scenario would imply that the U.S. no longer offers the same protection against rising inflation,” said John Butler, macro strategist.

“If the Fed keeps rates elevated to combat above-target inflation, it will face increased political pressure, which could undermine its credibility, which again is a negative for investors,” he said.

Conclusions:

For over 20 years, the U.S. has benefited from almost relentless flows into US $ denominated financial assets. Bonds, equities, credit, the U.S. dollar all have benefited. Coming into 2025, the U.S. was about 25% of world GDP and 65% of global equity market capitalization. Was that a high-water mark?

The price action of the past five days suggests that there may be a gradual move in capital away from U.S. assets. And that trend could accelerate if the disruptive Trump tariff and immigration policies continue unabated.

Investors are now raising questions that would have previously been preposterous.

In a Friday report to clients, Evercore ISI’s Sarah Bianchi says that the disruption and uncertainty unleashed by the Trump administration in its first two months is so extreme that even a full rollback of its trade policies probably wouldn’t matter. While tariff policy is the proximate cause, she opines that the U.S. is now upending the global trading system it built over decades.

A very real concern is that while Trump may be able to cut a few tariff deals, when the issue is a broader loss of confidence in the United States, even a much fuller retreat on trade might not work.

The global financial system has never been subjected to such turmoil, chaos and uncertainty before. Yes, that also includes the 2008-2009 mortgage meltdown/ financial crisis.

Closing Quote (emphasis added):

From Jonas Golterman, Capital Economics Friday note, “How to lose a safe haven status in 10 days:”

“After another tumultuous week across financial markets, the dollar is on track for one of its worst weeks on record. At this point, the main question for the dollar is no longer what the direct effects of President Trump’s tariffs will end up being. Rather, the key questions are around the indirect damage done through generating extreme uncertainty around the policy and economic outlook, the ongoing dislocations in the U.S. Treasury market and, ultimately, undermining confidence in U.S. financial institutions and asset markets.”

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Stay calm, success, good luck and till next time……………..

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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