The selloff in US bonds has sparked a global dump of developed world sovereign debt.
Since US yields started rising after the Fed meeting in Sept, global bond yields are higher, while the dollar and gold are surging, reflecting an increasingly global debt contagion.
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While many in the US are laser focused on the US yield rise in recent weeks, what is notable is how it looks to be flowing through to global bond markets in a way that is pretty disconnected from their own underlying domestic conditions.
US yields up nearly 70bps since mid-Sept
UK yields have risen in line.
German yields are up despite very weak economic reports.
Aussie yields sharply higher.
Canadian yields are rising despite very weak economic conditions and outsized cuts from the BoC with indications of further cuts ahead.
Even Japan which has scrapped intentions of a more aggressive hiking cycle has seen yields move higher.
While nearly all bond markets have sold off during this period, what makes the contagion particularly stark is that these bond markets have sold off while the currencies have also sold off.
The yen being the most notable of course, moving 13pts since Sept 16th.
But so too the euro is down vs. the dollar.
Sterling is starting to fall in recent days after a short-lived pop.
Same pattern with AUD, now pushing back toward cycle lows.
And CAD pushing new lows vs. the dollar as well.
Taken together this is a pretty acute move both out of these countries bonds, but also out of their currencies, suggesting a pretty full scale withdrawal of capital from global sovereign debt markets and currencies, particularly if thought about in gold terms.
Everywhere investors are dumping long-term gov bonds.
It seems the global central bank shift to easier monetary policy punctuated by the Fed meeting in Sept has sparked a serious questioning of the current value of developed world sovereign bonds at the current level of yields.
For many developed economies facing slower economic conditions and fading inflation pressures, these moves are all the more notable because they run counter to the trends in underlying domestic conditions and intended monetary policy.
While this repricing of sovereign debt has a direct impact on bond holders, the rising cost of capital is likely to become a drag on global equity markets from both the undesirable economic tightening and rising discount rates. Already we are seeing some leveling off in markets:
Sovereign debt yields serve as the backbone of global financial asset pricing along with real economy borrowing transactions.
A further flight out of sovereign debt risks creating a broader drag on other financial assets and these economies.
The combination of a commitment to 'over easy' money from central banks and continued expansionary fiscal policies across governments are driving this trend to continue.
It creates an increasing risk of a challenging repricing of higher risk-premiums and discount rates ahead.
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Despite the political euphoria that's come from passing the BBB, netting out the impacts of immigration and tariffs under either current or likely policy suggests a negative shock to growth in coming quarters.
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Federal government policies are typically reactive to underlying conditions in the private sector and so while they can be important influences on growth, they rarely drive substantial growth pressures as a standalone.
The magnitude and direction of the policy suite from the new administration is relatively unusual - creating a large pressure on growth somewhat independent of what was happening in the rest of the economy (which was a pretty boring late cycle deceleration).
When most portfolios are long only, flexible strategies that can go short to cushion negative return periods are uniquely diversifying.
The challenge is finding cash efficient, low cost, positive return strategies that do it. Managed Futures run at 2x is an option.
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Allocators often face challenges designing portfolios that can help limit losses in down market environments. Despite the need, there are few investment offerings that perform well when other assets underperform but don’t have burdensome drag on the portfolio over time.
Some folks use buffer products, but those are often structured in a way that can limit upside. Others add out of the money puts, but that often results in meaningful negative return drag over time as premiums go unused.
For years the housing market has almost levitated despite drags from high rates and high prices thanks to limited supply and other assets financing demand. But in recent months that's started to flip.
The housing market has been much more resilient in recent years than most had expected in the face of very high rates. The biggest reason for that was that while buying demand dried up following the post-covid surge in rates, so too did supply.
In the last 6 months or so both have shifted to be more negative for prices. Inventory of new and existing homes have picked up while the slowing of asset prices combined with still high mortgage rates has caused buying demand to hit new lows.
The Fed has no reason to cut based on the data that matters.
The risk of inflationary pressures ahead from both tariffs and rising oil prices due to the Mideast conflict will only further solidify their desire to keep rates steady for longer than most expect.
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While many folks are calling for immediate substantial cuts, the data that the Fed cares about just doesn’t support any move at all. Take the UE rate. It’s remained low with any context and been flat for almost a year, suggesting current policy is roughly neutral.
Payroll growth has slowed substantially particularly if you include the likely revisions to the data that will eventually come. But the Fed isn’t in the business of making bets on QCEW revisions quarters from now to make monetary policy today.
There are broad signs inflation is picking up across the economy.
Despite surveys and timely price measures showing signs of increasing price growth, markets remain complacent. Unless tariffs reverse soon, higher inflation will quickly become a reality.
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Today's measured inflation figures is the first to reflect the real impact of the tariffs (given the previous survey happened just after Liberation Day). Most economists are expecting a pickup in the CPI numbers for the first time in awhile, with core approaching % y/y again.
But measured inflation is just one view of many on how price growth is going in the economy. A broad set of triangulation shows price growth rising.
Take ISM services prices which is clearly rising in recent months:
The new admin has collected trillions in promises for new investment in the US from companies and foreign countries.
While these announcements make for splashy headlines, the actual economic impact is likely to be much more limited.
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It’s no surprise that a hoped for surge in business investment has become a real focus of many after it bailed out what would have otherwise been a pretty weak read on final demand in the 1Q25 GDP report back to highs of the cycle.
Many folks have pointed to the surge in announced new projects by the new admin as a key lever that can keep the expansion going even with some moderation in HH demand. Projects have totaled near 7tln. h/t @RMDiLillo for pointing me to this data!