Matein Khalid
The US Treasury bond market is unnerved by Powell’s reluctance to cut rates at the May FOMC and increasing short bets on long duration Uncle Sam IOUs by the world’s biggest hedge funds. This is the reason the 2-year Treasury note yield, the single security most sensitive to changes in expectation of US central bank monetary policy, has risen 15 basis points this week to 4.06% despite Bessent’s hyped success with the Chinese Vice Premier on trade talks in Geneva, the 10 year US Treasury note has risen to 4.53% and triggered a correspondent rise in the world’s cost of long term capital.
Since a Fed rate hike is not credible now, crude oil has fallen to the early 60’s on WTI and the Volatility Index has tanked to 18 in a benign milieu for risk assets, I doubt if the 10 year US Treasury yield will rise much above 4.70% in the short run, though the prospect of a 7% “forever” US budget deficit could resurrect the bond vigilantes, the demons of fiscal indiscipline, with a vengeance.
The US tax legislation changes, after all, are auguries of higher annual budget deficits and a rising tsunami of long term Treasury bond auctions at a precisely the moment when the Chinese are loath to increase their exposure to Uncle Sam, the Japanese, South Korean/ASEAN central banks will see trade surpluses with the US fall and reduce their appetite to bid for Uncle Sam debt and Gulf Arab central banks have less petrodollars to recycle since oil prices are $35-$40 below their budget breakeven prices while domestic spending ramps up.
The smoke signals from the Fed Fund futures contract at the Chicago Merc are increasingly ominous as the timing of the next Fed rate cut is pushed back to an autumn FOMC conclave. Another factor driving up yields above 4.50% on the UST-10 note is the heavy supply of mortgage back securities new issues, whose pipeline is usually hedged by broker/dealers in the T-bond futures pits. The proof of the pudding in interest rate futures markets now lies in April’s retail sales, PPI and jobless claims insurance tonight.
As I suspected, Bessent’s thrilla in Geneva was not sufficient to negate the consensus view on Planet Forex that the Trump White House wants a much lower dollar. The tidal wave of a strategic asset allocation shift out of the greenback by global central banks/institutional investors is not fooled by Bessent’s strong dollar mantra since he is, sadly, not POTUS. This tidal wave could be as high as $5 trillion or 15% of the $36 trillion invested by offshore accounts in US stocks and bonds since Lehman Brothers went belly up in September 2008. So I refuse to be an FX Ostrich with my head in the sand while Uncle Sam engineers another 40% devaluation of the buckeroo, as he did with the Plaza Accords under Reagan/Volcker in 1985 and again under Baby Bush/Bernanke after 9/11.
My home trading man-cave is filled with framed copies of busted Ottoman Empire era utility bonds (Electricite de Constantinople was a prime issuer in the offshore loan and sukuk market in 1913. Neither the empire, the company or its poor bondholders survived the Great War). To remind myself that James Bond 007 was dead right in FX – never say never!
The 8% rise in the Taiwan dollar in only 2-sessions, an event not seen in Taipei in 40-years, tells me that Asia is petrified that Trump will use its multi-trillion dollar hoard of US Treasuries as a trade bludgeon to devalue the dollar. John Meynard Keynes predicted precisely this scenario at the Bretton Woods conference with his concept of monetary seigniorage, a privilege abused by every banker to the world from the Caesars of ancient Rome to the imperial occupance of Topkapi Serai, Toledo, 11 Downing Street, the Élysée Palace and the White House.
As Nixon’s Treasury Secretary boasted to his foreign creditors when Tricky Dick suspended gold’s link to the dollar in August 1971, the US dollar is “our currency, your problem”. What exactly is the problem? The $36 trillion in investments owned by foreigners is entirely based on no anchor of value, like the price of gold. So the dollar has already devalued by 50% since late 2022 when Dr. Auric bottomed at $1600 an ounce. Sadly, this is the biggest heist in global financial history and it has barely begun. The DXY, trade weighted Dollar Index, now almost 101 can well devalue in the 4-years to 65-70.
The scale of US debt/deficits and US geopolitical power rules out any other conclusion for the simple reality that the 4% of the world’s population who happen to be American consume 30% of its resources and generate 60% of its debt. The world monetary system is designed to enrich the US and impoverish the rest of the world. The US dollar has lost 50% of its value since Maestro Greenspan took over as Fed Chairman in 1987 and 99% of its value since the Federal Reserve was created by an act of Congress in 1913. Store of value? Yeah right – suckernomics 101!
Also published on Medium.
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