Stocks Blow up, Bonds Blow up in Japan and US, as Trump Tariffs Swing Like a Wrecking Ball over the Global Economy
Today brought action on all fronts, all bad.
Well, that WAS sure a big bear-market rally! It’s gone now, though. Investor insanity could prove me temporarily wrong, but any optimism in the face of these tariffs and the impact I’ve been saying they will have on bond yields was completely delusional, and we got to see that again, today. Now we have only to see if the delusion is fully busted, but here’s the deal:
What we saw in bonds today here in the US and in Japan was some savage bond vigilantism and it was due to the combination of long mis-managed debts blowing up and high tariffs making funding those debts more difficult because of how lowered trade reduces the need for Treasuries as vehicles for exchanging dollars and yen.
You don’t see much written about that last part, which I warned months ago was key to understanding the huge damage that is coming. Because no one recognized that coming problem back then, they don’t recognize it now either; however, if someone can predict it is coming and state why it will come, and it hits just like they warned, then it must have be a foreseeable problem, even if no one else saw it: You clamp down hard on foreign trade, immobilizing it, you’re going to damage the Treasury market that plays a big part in foreign exchange.
Taking stock of stocks
Today’s dive in stocks also happened for the reason I said it would; in response to tariff-damaged bonds. We know that because it happened exactly at the point where I have said the market would experience serious troubles due to the breakdown in bonds. A 4.5% yield on the 10YR Treasury has almost always proven in recent years to be problematic for stocks because at that level, Treasuries get interesting enough to start pumping money out of stocks. So, it seemed like a given today that, when bonds did what bonds did today (as I’ll lay out below), stocks would dive.
The Dow fell more than 800 points today, leading the way down for the major indices, none of which have entered bear-market territory yet. So, why did I just call this a bear-market rally? Because I am completely convinced stocks will get their heads pounded down that low by the trouble brewing in bonds and by the trouble brewing in the whole general economy due to tariffs stymying business and due to the trouble brewing for our massive national debt, which also came into play for stocks and bonds today and is made worse by tariffs.
These are all things I’ve been tracking on my doom list for what lies ahead. They are the reasons the stock slide that began earlier this year will remain below its high for the year (and all-time high) in each of the major indices until they find their way down to hit full crash levels. To define my terms, I go by the usual definition of a bear market being a 20% decline from the last high. Keep it simple. 20% is arbitrary, but so are other definitions. It works for most people, so I run with it as a damage mils-marker.
Treasuries no longer treasured
It may seem a bit disjointed to say a sell-off in Treasuries is sucking money out of stocks, but even when Treasuries sell off fast enough to force up yields, those rising yields can still suck money out of stocks. It’s like stocks get stuck into their undertow, even if the money doesn’t flow into Treasuries as safe havens. If Treasuries are demanding high enough yields and paying them, then stocks look all the less interesting, so money leaves stocks, too.
Some of it may go into Treasuries because, even when Treasuries are down in price and net sales are down, there are still sales happening. So long as the stream of money flowing in from stocks and other source is smaller than the flow out of bonds, bond yields will rise. The rest of the money flowing out of stocks may flee stocks for cash or gold—also due to what is happening in bonds because that kind of trouble in the bond market that is damaging bonds as safe havens makes investors search for an even safer haven. It remains almost a given that when bond yields soar high enough as they did today, money in stocks is attracted to the higher yields or simply seeks shelter.
Gold started rising on Friday and continued doing well today, but nothing astronomical. After all that happened today, I would think it will do well tomorrow as the gold dust settles over the mess in other markets … but I’m not in the gold predicting business. It just seems well suited to be the safe haven of greatest interest when stock prices and bond prices are tanking together. Crypto did great, too, with Bitcoin leaping to a new all-time high. For once it functioned like a safe-haven when stocks and bond prices fell simultaneously. So that was clearly one of the alternate paths money took out of stocks as bonds scared the wits out of stock investors.
What we saw today that seemed to precipitate all of this was the 10YR shoot up to 4.6%, a rise of 12 basis points that took it past the critical mark. Stocks shuddered as soon as it climbed past 4.56%. 4.6% must have felt like a terror when that was crossed at the end of the day, except that happened after the stock market closed, and the yield may drop in the morning once the stock market opens up and starts allowing a larger flow of money out of stocks and into the risen yields of bonds (unless the money goes to crypto, gold or cash as a safety net).
The 30YR Treasury rose more than 12 basis points to finally hit 5.0% at 5PM, which has been its key level for causing trouble.
Particularly problematic for US bonds was a Treasury auction of 20YR debt.
A debtors’ prison
The major chunk of news today that jerked the US bond market around was that the massive debt bill (let’s just call it that, rather than a budget), which was ranked in some headlines as the “most expensive bill in US history” is having trouble getting passed, and news of how bloated it is didn’t settle well over markets.
The size of the bill, which is struggling to find enough Republican support, requiring a last-minute meeting at the White House, is troubling the bond market because it assures no progress made on a deficit that just brought the final one of the big-three credit agencies down to match the other two.
“The question now is, from a fiscal perspective, what will the tax bill look like, and will it undo all of the recent fiscal frugality by simply raising the debt level at a slower rate of pace? So I think that’s why the 10-year yield is moving higher — because investors are worried that we’re really not doing anything to slow the pace of inflation and to reduce the debt,” Sam Stovall, CFRA Research chief investment strategist, told CNBC in an interview.
Likewise with why the Treasury auction of 20YR bonds went poorly.
Treasury yields had spiked last month as worries over President Donald Trump’s tariffs dented confidence in the safe haven status of U.S. debt. The 10-year in April swung from below 3.9% to more than 4.5% in just days. Yields eased from those levels after Trump announced delays on when the levies would take effect.
Moreover
The bill could end up increasing the U.S. government’s deficit by trillions at a time when fears of a flare-up in inflation due to Trump tariffs are already weighing on bond prices and boosting yields.
Pushing that kind of bill is just totally irresponsible when your nation’s credit has been downgraded by everyone that matters because it has gotten too top-heavy.
But now the troubles are even worse because of the poor 20YR auction and likely because of the ruckus in Japanese bonds.
The fear is that the buying appetite for U.S. Treasurys could be drying up as the supply of new debt to pay our bills increases….
Tariffs have a big impact that way.
“While the selling of U.S. Treasuries in the immediate aftermath of the Moody’s downgrade was relatively modest, Treasury yields have climbed steadily since the end of April as budget negotiations have come to the fore,” wrote Mark Haefele, UBS Global Wealth Management chief investment officer, in a note Wednesday. The Republicans’ bill “is expected to add trillions of dollars to the country’s [$36 trillion] deficit over the next decade. This will likely lead to an increase in the supply of Treasury debt, exerting pressure on the bond market….”
Again, I will add the always missing point: As the need by foreign central banks to have abundant Treasuries for exchanging funds is diminished because tariffs are ravaging international trade funding that bloating debt becomes harder.
“We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration,” Moody’s said in the report.
Clearly not.
Japanification
Japan’s beleaguered bond market is also weighing heavily on the US market, mostly as a feared sign of things to come because our own debt is so huge:
A dramatic lurch in the Japanese bond market has heightened fears that debt-heavy Western governments such as the UK and even the US could be in line for a budget-busting financial crunch.
I think we saw some of that today. As Japan suddenly did a lot worse yesterday, the US bond market became troubled today, and I expect that is a spill-over of fear in general about how out-of-control our poorly managed sovereign debt has become. Governments don’t seem ready or even seem to know how to manage their cumbersome debt anymore, and they lack the resolve.
Limp demand for government-issued 20-year bonds at an auction in Japan on Tuesday sent tremors through the debt markets, pushing long-term Japanese yields – the government’s cost of borrowing – to the highest in decades….
Shigeru Ishiba, Japan’s prime minister, warned the country’s parliament on Monday that his debt-strapped government’s position was “worse than Greece”, signalling just how vulnerable the world’s third-largest economy could be to a meltdown if markets lost confidence.
We’ve seen this before where Japan had problems, and that suddenly spilled over to a panic in the US. (After all, they are a huge buyer of US Treasuries, holding over $1-trillion in US Treasury bonds.)
The wider fear is that Japan is a canary in the coal mine. In a world of Donald Trump-induced volatility and uncertainty, bond market investors could quickly lose faith in any one of the debt-dependent governments of the West.
“The pressure on both Japanese and US bonds this week is a sign bond traders are willing to punish high-debt nations with large deficits,” says Kathleen Brooks, an analyst at XTB.
“This is an issue that has hurt the UK in the past, it is weighing on the US right now, and Japan is also coming under the spotlight.”
When bond investors turn against bonds like this and take control of interest rates away from central banks, we call them “bond vigilantes.”
Jittery investors are demanding more reward for the growing risk of holding long-term government debt by marking down the price of bonds and driving up their yields.
This will become very painful for the US government as it amasses more debt to manage. Bond investors aren’t having it without raising the yields substantially, and tariffs are causing fewer buyers.
The Tokyo tremor began on Tuesday, when the government tried to sell 1 trillion yen (£5.2bn) of March 2045 bonds and encountered lacklustre demand.
The average bid-to-cover ratio, which measures investor appetite, dropped to 2.5 – the lowest since 2012. The 1.14-point gap between the average and lowest-accepted prices, known as the “tail”, was the longest since 1987.
Investors responded by pushing the Japanese government 20-year yield to the highest this century, and the 30-year yield to a record.
In light of the latest Moody’s downgrade to US credit, investor are wondering if the US is next in line for this kind of action. You already know I believe tariffs will make sure those problems hit this year.
“The government is not in a position to comment on interest rates, but the reality is we are facing a world with them. Our country’s fiscal situation is undoubtedly extremely poor, worse than Greece’s,” [Japan’s prime minister] said.
You know the situation is bad when an incumbent PM facing a tough re-election soon, has to say his nation is worse off than Greece! That’s a pretty low bar.
Katsunobu Kato, Japan’s finance minister, was even more stark, warning of the damage that could flow from the market ructions. “A loss of market trust in our finances could lead to sharp rises in interest rates, a weak yen and excessive inflation that would have a severe impact on the economy,” he said.
The US is not standing all that far behind Japan on that precipice, and the president’s big fat Beautiful Bill is not helping any. What we need is a trim bill.
Part of Japan’s crunch is that the central bank is trying to bring down its balance sheet and cannot afford to lower interest because Japan is seeing rising inflation. That is the same bind I have said for a long time the Fed will find itself in during its present attempt to unwind from its loose-credit, money-printing days now that it is pressed to tame inflation. With tariffs driving inflation up, the Fed will be loathe to be possibly identified as the responsible party for resurgent inflation as could happen if it is seen lowering interest in order to try to bring down the cost of the US debt and make it more manageable or in order to stimulate an economy that is going to freeze over because of tariffs. The tariffs couldn’t have hit at a worse time because this was already going to be a Gordian knot to try to untangle.
The wrecking ball Trumps all
That is why, when I hear people say Trump is God’s appointed president, I say, “Then he must be God’s wrecking ball for America because these tariffs are going to assure the hammer drops hard.” If I’m wrong, I’ll likely quit writing on economics. I don’t anticipate much chance of being wrong now that we are seeing all the dynamics moving together in the way I wrote about—stocks, bonds, faltering bond auctions, US credit ratings, bank credit ratings (just downgraded by Moody’s because of their association with the US), rising inflation, and hugely diminishing global trade—the whole complex mess. We’ve seen all of that fly past us in the news this month.
And the high on-again/off-again Trump Tariffs are contributing negatively to every one of those components (some more significantly than others, but all negatively). A president trying to take over neighboring countries at the same certainly isn’t helping anything. On top of that we also have big real-estate troubles, but those are not exacerbated by the tariffs; and, as I’ve predicted all along, they will not be the main driving force this time around, but more something coming along for the ride. With all of that, will come waves of debt defaults and now dollar troubles due to the tariffs’ effect on Treasury bonds and bills.
Trump’s tariff tirade has clouded every crystal ball, putting markets on a hair trigger. Behind that, there are mounting worries about the sustainability of the American and other Western governments’ fiscal positions.
The news here is bad for the UK, too:
The UK bond market is regularly buffeted by events in the US…. Uncertainty and tighter monetary policy in the US can be imported into the UK.
The US is “rated by BNP Paribas as the most fiscally vulnerable developed economy.” So, if Japan doesn’t blow up the global economy, the US likely will.
So, bombs away!
Thus …
The European Central Bank on Wednesday said a “fundamental regime change” could be underway in financial markets as investors appear to be reassessing how risky U.S. assets really are in the wake of trade tariffs….
The central bank discussed the recent spike in market volatility off the back of global trade tensions driven by U.S. tariff policy.
They further noted …
some atypical shifts away from some traditional safe havens like US Treasuries and the US dollar….
“These moves might also have reflected perceptions of a more fundamental regime change, with investors seeming to reassess the riskiness of US assets, possibly leading to broader shifts in global capital flows,” the ECB noted. “This would have potentially far-reaching consequences for the global financial system.”
Bombs away as the wrecking ball sways!
Oh what fun!