AGG: Dollar Recycling System Halt May Trigger Largest Ever Bond Market Crash

2025-04-12 05:33:37 ET

Summary

• The recent crash in AGG and other bonds and a declining US dollar suggest a significant repricing for debt monetization risk.
• Foreign selling of US Treasuries, particularly by countries like China, is potentially driving this shift, indicating a potential long-term collapse of the US dollar recycling system.
• The correlation shifts between AGG, the US dollar, and equities highlight foreign activity's critical role in the bond market's changes, ending AGG's historically inverse correlation to stocks.
• I prefer short-term US and foreign-currency bonds as alternatives to AGG, due to their lower exposure to a steepening yield curve and a weakening US dollar.
• It is impossible to precisely predict whether this shift will result in a highly inflationary debt monetization. However, the odds of that occurring seem to rise by the day, accelerated by a loss of the dollar's haven status.

In January, I outlined my view that the surge in gold compared to bonds signaled Treasuries may be repricing according to debt monetization risk in " AGG: Gold Is Signaling A Debt Crisis In Bonds ." The Aggregate bond ETF ( AGG ) rose temporarily over the past three months as the equity market shifted in a defensive direction. However, to the surprise of many, AGG has crashed over the past week, following the stock market's lower. AGG is about a half percent lower than when I published that bearish outlook.

On Monday, amid a spike in equity market volatility, I offered an extra note explaining why I am not in a rush to buy the dip in either bonds or stocks, saying:

While it is too early to say with certainty, if the US dollar loses that status (Monetary hegemony), I do not think the S&P 500 will recover compared to inflation. The "sign" that this is occurring will likely be if US Treasury bonds lose value or fail to rise while stocks crash, indicating a foreign exodus of US financial assets. This is not yet confirmed, as Treasuries generally rose last week; however, if we see funds, like TLT, decline or stagnate while the S&P 500 falls, I would caution against dip-buying because that may signal a long-term collapse of the US dollar recycling system that has driven its historical recovery.

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