USVM - Market Commentary: The Dog That Does More Than Bark
2025-02-08 04:00:28 ET
Summary
- Sinking yields lessened the intense pressure on EM currencies, pressure which had forced 'doom loop' EM currency intervention and associated liquidation of international holdings.
- Lower global yields have been instrumental in restraining crisis dynamics at the 'periphery' that were increasingly transmitting contagion effects to the vulnerable core.
- I also expect the bond market to now take a more skeptical view of budget negotiations.
Treasury Secretary Scott Bessent's Thursday comment is credible: "The President wants lower rates. He and I are focused on the 10-year Treasury and what is the yield of that."
"Everyone has a plan, until they get punched in the mouth" (Mike Tyson). The Trump administration definitely has some grandiose plans. Dressed in baggy attire and too often projecting a pacifist temperament - but when pushed too far, the bond market can reveal the inner brute force of a prizefighter. Global bond markets have been agitated over recent months. The resurrected bond vigilantes have been circling.
But global bonds have enjoyed a nice rally of late. After trading at 4.80% on January 14th, 10-year Treasury yields touched a seven-week low of 4.40% during Wednesday trading. UK gilt yields dropped from a 4.92% trading high to 4.37%; French yields 3.49% to 3.05%; German yields 2.65% to 2.34%; Italian yields 3.85% to 3.43%; Canadian yields 3.56% to 2.88%; and Australian yields 4.66% to 4.29%.
Sinking Treasury yields were especially pacifying for distressed EM bonds. Brazil's dollar bond yields sank from 7.11% to 6.49%, with Mexico's yields falling from 6.80% to 6.38%. Local currency yields swung from 10.46% to 9.71% in Mexico and from 15.44% to 14.31% in Brazil.
Importantly, sinking yields lessened the intense pressure on EM currencies, pressure which had forced "doom loop" EM currency intervention and associated liquidation of international holdings (chiefly Treasuries). And with significant hedging in Treasuries and the currencies, the reversal in global yields spurred the unwind of hedges - providing additional trading support for lower yields and a weaker dollar.
Lower global yields have been instrumental in restraining crisis dynamics at the "periphery" that were increasingly transmitting contagion effects to the vulnerable "core." Surging Treasury yields were approaching the pain point of aggressive hedging, de-risking, deleveraging and waning liquidity - an especially problematic dynamic for such a highly speculative equities market. The manically Crowded Mag7/AI/tech trade is especially vulnerable.
In the grand scheme of things, the pullback in global yields has been shallow and about what one would expect in an unsettled backdrop. It's worth noting that after trading to 4.22% in October 2022, 10-year Treasury yields were back below 3.40% in April 2023, only to reverse sharply higher to 5.0% in October 2023, back down to 3.80% to end '23, up to 4.71% last April, down to 3.65% in September, before surging back to 4.79% by the middle of last month....
Market Commentary: The Dog That Does More Than Bark