DANCING TO THE EDGE OF DEFAULT
Trump & Bessent Tried & Failed
Most are focused on the intervention we witnessed Wednesday … AFTER the US bond market crashed Tuesday night sending BOJ into an emergency meeting; followed by Treasury Secretary Bessent talking up bonds same time as the 10Y auction; and President Trump soon after to delay tariffs that triggered an historic short-covering rally in equities.
I caught both real-time and shared with clients, but then I warned Wednesday night:
I want to remind that our bond market is so fragile that it REQUIRED intervention to save it. Translation: what Trump & Bessent are doing isn’t working. They tried to re-assert US Treasuries as a top tier asset by pushing lower equities in hopes of rotation, but that didn’t work.
Since the beginning of the year, the market correction has resulted in a loss of approximately $9.6 trillion in market value for the S&P 500, according to Forbes. A large portion of this loss, around $5.83 trillion, occurred within a four-day period following President Trump's announcement of tariffs.
And bonds?
Equities have shed nearly $10 trillion but bonds have returned 1%. Risk Parity is broken. Investors/Funds with a stock/bond portfolio are not only hurting but exposed to great risks as US Treasuries continue to lose credibility and value due to policies that are clearly not working for bond holders at the very least. Keep in mind, fixed income is the 2nd largest market in the world after currencies. They matter.
Even their attempt to remove the intervention collar on oil failed to pull yields lower. Crude oil is down -15% YTD - half of it since April 2nd. Yields are higher than before tariffs were announced and higher after tariffs were delayed.
Gold is up +19% as USD continues to crash lower. The risk of US yields continuing to rise with gold as dollar falls is a sure sign that they are losing control.
Moving To The Exits
The psychological and financial damage from a mercurial president and his market manipulation has begun to erode US fiscal credibility.
Even as tariffs were temporarily delayed by Trump Wednesday, the policy uncertainty around tariffs and dollar hegemony have created a permanent sense of structural shifts that are undermining investors, businesses and global trading partners from positioning bullishly, let alone safeguarding their investments & capital.
So they are selling, not hedging, to raise cash, as collateral values fall.
And then there is the sub-text:
Fears are growing that funds with trillions of borrowed dollars tied up in bets on the price of US government bonds are rushing to raise cash. via The Times
GOLD is the new VIX
As fiscal credibility is eroding, and markets are starting to price in a higher risk that the U.S. might default or debase its debt, here are the things I am tracking for signs of its progress: