The Trump Trades Are Inflamed

A few stories today affirm yesterday’s editorial about the precariously high risk in the US bond market and its causes and the effects on stocks. The articles below name three causes of the crisis in US Treasuries and stocks—tariffs, the bloated national debt; and, for stocks, the rapid rise of the 10YR Treasury bond to yields above 4.5%.

The decidedly unsexy bond market is usually pretty quiet. But when they want to, bond investors can send a loud, clear message to Washington. They did just that Wednesday and Thursday.

The 20-year bond auction conducted by the US Treasury on Wednesday afternoon was unusually weak: Demand for the bonds was the lowest since February, according to the Treasury Department. Investors who bought the bonds sought a higher-than-expected yield — effectively saying they wanted to be paid more for taking on the risk of lending to Uncle Sam.

That sent a big warning to President Donald Trump and congressional Republicans. The poor demand means that investors who lend money to the United States think the Trump agenda — in particular, the “Big, Beautiful” tax cut bill — has made America an unacceptably risky investment. They are not going to keep funding the government’s coffers unless they get paid more for it.

And the problem there was they took a look at Big Beautiful Bill and said he’s way too fat. He promises to inflate the government debt by a minimum of another $4-trillion.

Apparently, Team Trump did not get the message, however, because the House of Reps gave Fat Bill a free pass with the slenderest of majority votes—just one.

“The fact that lawmakers passed this bill less than a week after America’s latest credit downgrade and yet another worrying Treasury auction is especially maddening,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. “Will nothing wake our leaders up to the need to take our debt challenges seriously?”

Apparently not. One Republican, however, did speak out against this bloated budget disaster of bubbling fat:

This bill dramatically increases deficits in the near term, but promises our government will be fiscally responsible five years from now. Where have we heard that before? How do you bind a future Congress to these promises? This bill is a debt bomb ticking.

It amazes me that people have not woken up after all these years to this continual congressional trick—raise the deficit today and say what a marvelous job of reducing the deficit you are doing because you’ve hammered out a plan that, five years from now, will be reducing the deficit … as if any congress can tell a congress five years from now what their budget will be when the current congress can barely manage to tell each other! But they have done it over and over for decades; and, of course, not future congress pays the new plan a shred of attention when they pass their own budget. It’s endless smoke and mirrors, and they did it once again!

The $4-trillion extra to the deficit noted in a few articles may have understated Bill’s obesity:

He estimated that under the bill’s taxing and spending levels, the national debt could balloon by as much as $30 trillion over the next decade.

“Congress can do funny math, fantasy math, if it wants,” Massie added. “But bond investors don’t.”

“We’re not rearranging deck chairs on the Titanic tonight. We’re putting coal in the boiler and setting a course for the iceberg.”

Maybe they should call “Big Beautiful Bill” “Barnacle Bill” because he’s going to be spending a lot of time at the bottom of the sea where he looks like he belongs. You remember him:

Yields have also been rising all over the world, creating competition for US bonds. And the “Sell America” trade — in which US stocks, dollar and bonds have become less attractive — has reignited over growing debt concerns because of the tax cut bill and Friday’s US credit rating downgrade from Moody’s. That raised fears that foreign investors may not want to invest in US Treasuries in the future.

So, it looks like money is peeling out of US stocks and bonds and going overseas to find safer havens. And that is causing the dollar to lose its global trade currency status at a rapid rate, as I warned about awhile back:

“The most troubling part of the market reaction is that the dollar is weakening at the same time,” said George Saravelos, head of FX research at Deutsche Bank, in a note to investors. “To us this is a clear signal of a foreign buyer’s strike on US assets and the associated US fiscal risks we have been warning for some time. At the core of the problem is that foreign investors are simply no longer willing to finance US twin deficits at current level of prices.”

And, while money is flowing out of stock and bond markets, likely into foreign markets, Liz Ann Sonders of Charles Swab mentioned the bond money pump I talk about where rising bond yields compete with the stock market for investor funds, but she especially pointed to other factors in the movement of bond yields that are driving money from both markets.

To some degree, the bond market is in the driver’s seat for the equity market, and it’s not really just about levels—some threshold above which the ten year hits and it causes trouble for the equity market—but it’s the why and the speed, too.

The latter two triggers—why bond yields are rising this time and the rate at which they are rising—are panicking stock investors away from their normal safe haven in US Treasuries, even as yields rise to where they would look attractive in times when stocks start to feel risky. Now that the US, itself, looks risky, however, it is driving a lot of equity money into foreign markets as safer altogether than the US.

If yields were moving up because the growth trajectory were improving, I think the equity market would be fine, but it’s the broader concerns about the debt and deficit and the ability to finance that.

Still, after pointing out the big contribution to market worries from the nation’s swollen debt problem, she alluded to the money pump I’ve talked about:

That break out above four-and-a-half percent again on the ten-year … is not sitting well with equities.

Then the video visually noted other factors in yesterday’s market panic talked about in my editorial yesterday:

• The Moody’s credit downgrade.

• Trade-tariff headlines are continuing to drive volatility.

Feeling Moody’s

As to that Moody’s downgrade, another article states,

Moody's decision to downgrade the U.S. debt rating by a notch late last week due to mounting government debt and rising interest expenses has rekindled fears of a broader investor reappraisal of U.S. sovereign debt, which could drive up borrowing costs across the economy.

That would happen because many, many loans have interest rates pegged to the 10YR US bond. The article also talked about how “rising yields … put pressure on stocks that are trading at elevated valuations” in the manner I’ve talked about in the past, which is (part in bold):

Higher yields have repercussions for stocks, analysts and investors say, as they represent higher borrowing costs for companies as well as greater investment competition from fixed income….

Over the past few years, stocks have come under pressure during some instances when Treasury yields moved above 4.5%, with sharply rising yields often negatively correlated with stock performance.

In a note on Monday, Morgan Stanley equity strategist Michael Wilson said 4.5% on the 10-year yield has been "an important level" for equity market valuation over the past two years, with stocks tending to face valuation pressure when 10-year yields breach that threshold.

Another article from CNBC noted today,

A U.S. Treasury selloff is prompting some market watchers to reassess their stance on fixed income allocation, after “relentless” action from yields on long-dated Treasurys saw those bonds surpass a key 5% threshold….

Surging U.S. government borrowing costs have prompted some market watchers to rethink the status of American government bonds as a go-to safe investment….

That became particularly evident near the end of the business day when the passage of Big Beautiful Bill tanked markets again. The Dow had climbed up over 200 points after yesterday’s trip into the hole, but once Big Beautiful Bloated Bill passed the house vote, the Dow fell back to a-buck-thirty-five below flat. The S&P, too.

Russ Mould, investment director at AJ Bell, labelled the rise in U.S. Treasury yields “relentless,” noting that it was a reflection of “growing disquiet” over swelling U.S. federal debt….

Mould added that half of publicly held Treasurys — or some $14 trillion of federal debt — would soon mature and need to be refinanced at higher rates.

Then he noted how this sudden trouble could be the start of a US bond/national-debt death spiral:

“Emerging market investors will be very familiar with the risks attached to the current situation,” he said. “Higher bond yields mean higher interest bills, higher interest bills mean more debt, more debt may mean QE [quantitative easing] or efforts to loosen monetary policy, only for that to perhaps lead to higher inflation, higher interest rates, higher bond yields and around we go again.”

“This is a classic emerging market trap, except America (and for that matter Japan) are staring right into it,” Mould added.

Staring into the abyss

We are now wobbling above the abyss on a burning tight rope. Japanese bonds have soared in no time at all to their highest level in 25 years, so they are pretty well already in crisis mode. They have long been the support of US sovereign debt. However, there is a threat from the Japanese crisis for the US, too. Rising Japanese bond yields are raising competition for US Treasuries. As Japanese investors now start pulling money out of US Treasuries, some are putting it into Japan’s own yen-denominated government bonds.

With Japan being one of the largest holders of US Treasuries, in part due to all of its previous massive commercial trade with the US, the change of flow from US dollars into yen (i.e., from US bonds to Japanese government bonds) makes it more challenging to find enough buyers for that rapidly ballooning US budget deficit just approved by the House today, and it helps take down the dollar as the global trade currency.

There are so many interconnections here between the various factors I’ve been saying will cause an economic collapse for the United States (and likely a good part of the rest of the world) that it looks like they are all ganging up.

“The savings that have been dispersed around the world — and there’s a lot of talk about how much is parked in the U.S. at the moment — it’s going to start repatriating,” he said.

Fleeing investors are not good for a morbidly obese nation, trying to digest the world’s biggest bellyful of dollar debt.

“We see clients pulling back from the United States... And the data we look at shows that we’ve seen monthly repatriation purchases of Japanese assets that [are] you know, two, three times what they’ve ever been — now suddenly they get 3.1% on their own domestic bonds, and they don’t have the currency risk. So they’ve got incentive of … proper yields on their bonds. Why wouldn’t they come home now?”

That helps Japan with its crisis as it shifts that crisis to the US. Meanwhile, the Trump Tariffs and land grabs assure there will be no sympathy for the US as it topples into the hellish crack in the earth that it looks about to fall into.

“Yes, US bonds have a more attractive starting yield than they had previously, but the reasons for that increasing yield remain and in the last few hours have become more acute,” he said.

“The move away from US assets is unprecedented and it’s impossible to say right now how high US Treasury yields could go,” he explained….

John Murillo, chief dealing officer at London-based liquidity solutions provider B2BROKER, argued that … the historically-held notion of Treasurys being close to risk-free investments may need to be revised.

This is being referred to as “pressure on the US exceptionalism trade.”

The dollar has lost 5 per cent of its value against a basket of major currencies since Trump’s tariff “liberation day” on April 2. It has fallen 10 per cent since mid-January….

As investors sought alternatives to US assets on Thursday, the value of Bitcoin was at a record high of $111,223.70, up 19 per cent since the start of the year.

As the US loses more and more of its trade-currency status that gave it that “exceptionalism” by losing lots of buyers who were once willing to chase after US debt at low yields, it risks falling into a debt spiral.

Francesco Pesole, FX strategist at ING, said: “The view is that, with this bill, Trump is playing with fire with the deficit.

“It’s causing a co-ordinated sell-off in equities and Treasuries, and the ‘Sell America’ theme is obviously quite negative for the dollar.”

Trump’s doing that with tariffs at the same time as he turns up the flames with this massive spending bill. He’s a regular fire juggler. It’s a high risk act, and he may be juggling on a tight rope that no longer has a safety net as major money pulls back and heads home to other nations.

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