The Bonds that Tie

What is the bond sell-off going to cost you?

When I was in the bond business, I once heard the joke that seeing bond traders panic as like seeing your parents cry: You don’t understand why, but you know it’s bad. The White House appears to have spooked itself, but to hear that crew tell it, all the stock madness was part of the plan to send investors screaming to the bond market, drive prices up and yields down so that the government could refinance that $6trn in debt we need to refinance June. That isn’t what happened.

Japan’s Nikkei newspaper has dusted off a term from the end of Japanese post-war miracle to describe what did happen: Triple Yasu. Which would sound much better in a sushi bar swimming in a bracing martini. As it is, the term described a triple selloff of stocks, bonds and the yen that Japan never quite recovered from. Ironically, my favorite sushi restaurant just closed for renovations and there has to be a metaphor in there somewhere.

The analogy, while terrifying, isn’t exactly apples to apples. The Japanese yen was never the world’s reserve currency. So those deep financial markets combined with a reserve status on the dollar makes us think that we are not, like the Japanese in the early 90’s on the cusp of a few economic “lost decades.” Whats more, the $29 trn market for US treasuries is deeper and more liquid than any market in the world. Its sheer size makes it inherently stable, but it does start to make you think about what actually causes a star to collapse.

Still, normally when the world goes haywire, investors move from one US asset class to another. Chase those fact American returns until you money wants to come in out of the rain and shelter in safe, US Treasuries. Now it looks like investors are reducing their exposure to the US in general.

The term that trends a bit tighter is the one from the Financial Times. The “Moron Premium” describes what happened when former UK Prime Minister Liz Truss floated the infamous 2022 “mini-budget”, markets went haywire, so she promptly reversed course, fired her finance minister for suggesting it in the first place and got ousted herself. And three years later investors are still demanding premiums on UK gilts. In short, you can make a bone-head mistake, and make a correction, but you can’t make the world forget that you are, in fact, a moron.

So… how much is this going to cost you?

The 4717 shot:

One advantage to a reserve currency is what is being called “exorbitant privilege”. Which is econo-speak for “the ability of the US to effectively prints gold, gives in the ability to borrow at lower costs. Which is why we borrow so damned much.” Still, US bands are linked to mortgages, as well as household and business debt, and with yields up, that will raise borrowing costs for the government and you. And a weak dollar very well might stoke inflation. So there is that.

Let’s put this into context though. Some have speculated that Beijing, holding $750bn in US Treasuries, had something to do with the sell-off of the dollar. Maybe, but that would be a tactical retreat, not a strategic move. A massive sell-off of the greenback would hurt China more than it would hurt the US. And the simple truth is that the US markets are just too large to ignore, the way that UK gilts can get pushed to the left hand side of the road. The rest of the world may resent the US for controlling the world’s reserve currency, but there is literally, not figuratively, no other viable option at the moment. There may be cause for worry in the long term – the pound sterling lost it’s reserve status, but it took better than a generation of slide for the dollar to over take practically, and another 20 more years to formalize the status.

The QED is that the shedding of US assets is a bad thing for America as it will put a lot we take for granted at risk. But there are a lot of US assets, and right now they are at the center of things. This will take a hell of a lot longer than an election cycle.

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