A PLANNED DEFAULT
Late-Night Emergency Client Note to help you navigate a global market melt-down risk.
Ready Or Not
Literally my 1st line in my market thoughts post yday:
"What if I told you the selling isn’t done? Would you believe me?"
I highlighted the abhorrent liquidity situation across equities and rates markets and the persistent selling under the surface which I track constantly for clients.
I also highlighted my call on the 10Y2Y yield curve steepening and reminded credit spreads are still in play - as warned since February they were going to trigger, but the market didn’t see it yet.
Then there is the 1st sentence in my weekend client post in capital letters/bolded:
VOLATILITY IS NOT DONE BIG PICTURE
When the 10y was at 4.33 earlier today, as the 10Y2Y yield curve exploded 144% in 4 days & a few hrs - I watched the articles hit my inbox from favorite bloggers who are typically "consensus bulls". Like this one:
VIX Playbook: Now It's A Crisis - @DataTrekMB
"The only times the VIX has closed over 50 since its introduction in 1990 were in 2008 – 2009 (the depths of the Financial Crisis and Great Recession) and 2020 (Pandemic Crisis).
Since 1990 (9,201 trading days ago), the VIX has only closed over 50 on 75 days (including today), or 0.8 percent of the time."
Yes, that read 0.8 percent of the time. Yes, this time is different.
Then Tonight Happened
In my #LiveTradingRoom this morning I warned #VVIX & VIX were just warming up as SPX hit the wall of $5265 & reversed on cue!
Before market closed at 3pm ET the 10Y2Y yields curve spiked above my +45bp target from Mar 28th steepening call into a scary +.522!! Yen was moving strongly higher with Yuan.
Then Municipal funds were selling off hard after market close. This is not part of my MONEY GOES HOME thesis as the money is already here! (Foreign holdings of municipal bonds ~3%.)
Selling in munis is likely forced selling from a bank or pension fund in a collateral trade - like gold selling off since April 2nd and bonds since April 7th - but bigger. It’s a canary in a coal mine for sure.
I had the rates trader of 30Y pop into my DM again about 6pm ET:
"Oh my ... so the entire swap curve now is neg ... finally overnight funding for the USG costs more than intrabank..."
The move in swap spreads was alarming.
And then it happened:
The US 10Y Treasury Yield is spiking to 4.5% and bonds are crashing as of 12 am ET - exactly when Trump's Reciprocal Tariffs Take Effect
You will read views that this is because of tariffs. You will read that this is because of inflation. You will read that this is recession risk spiking higher on trade war fears.
It’s deeper and more structural than that and encompasses all of the above and much more as this late-night session spike is a sign of seroius funding stress from:
Leverage unwind that forces de-risking in equities and basis trades
Collateral selling in commodities, oil, even gold, on global margin calls
Yen carry trade unwind meets Yuan devaluation triggering FX volatility
Foreign US Treasury selling from retaliation on tariffs
Japanese Norinchukin Bank selling US Treasuries triggering potential contagion
Impaired dealer balance sheets from forced liquidations & capital rotations
Sovereign default tremors & credit worthiness risks in US & EU bond markets
US insolvency issues.
Sovereign Bond Duration Shock
Back on February 21st, I presented an idea that still has legs:
With long bonds being sold non-stop, and oil with equities crashing, it’s time to check out my video on Norinchukin Bank and my calls for USDJPY impacting the yen carry and basis trade unwinds.
What if… this recent TSY selling is related to Norinchukin Bank, which recently announced plans to sell $63 billion in US & EU Treasury bonds to strengthen its balance sheet. Could this have domino affect? Could it force more banks in Japan forced to sell US Treasury bonds?
In which case, watch for policy intervention by Bank of Japan tomorrow.
Whether Japan or China, they have sizeable UST holdings they can unwind to cause this shockwave.