Uncertainty, combined with volatility, is certainly the atmosphere across markets and the macro picture as this year unfolds. The unpredictable nature of this President makes it difficult to forecast anything (everyone’s crystal ball has Trump written on it) and the chaotic nature of his ‘thinking’ leads many to suspect that he doesn’t actually have a plan. Unfortunately, the quality and competence of those that surround him is low and they are unable to stand up to him, leaving that to the likes of the head of the world’s biggest bank. 

“The bond market is now beautiful” said Trump recently after he pivoted to delay the implementation of his shiny new tariffs for 90 days for everyone but China who remain at 145% and have just responded with their own 125% tariffs. He joins the ranks of politicians who have discovered that displaying arrogance towards your sovereign debt markets does not have happy consequences. His ill-conceived, badly implemented and erratic tariff ‘strategy’ that came into force on ‘Liberation’ day caused equity markets to collapse (albeit from a high base) and then yields to rise leading to margin calls on highly leveraged players in both equities and bonds. These calls and the unwinding of basis trades (where investors borrow to buy bonds and sell associated derivatives) led to a wave of selling in US treasuries to raise cash, especially in ten-year and thirty-year bonds, and yields spiked higher, bid-offer spreads doubled and liquidity evaporated, conditions not seen since covid and the Global Financial Crisis. The US treasury market also suffered from a general loss of confidence in the US dollar and America Inc and foreign selling of US Treasuries intensified the rout.

Another tremor came earlier in February from talk about a ‘Mar a Lago’ accord. The idea of forcing your foreign creditors to switch their US Treasury holdings into ultra long-term bonds to weaken the dollar and lower borrowing costs might seem powerful but how it could be achieved without a flight from US bonds is incomprehensible, and the effects on the global financial system unfathomable, not least as it most likely would be seen as a credit event. China’s strong response to recent events mean that this concept is dead in the water.

Bear in mind that this is now a $36tn problem (US debt has doubled from $18tn in the last decade). The US dollar is the reserve currency and therefore US Treasuries are the world’s ‘risk free’ asset, but if there is a buyers’ strike and foreign investors do not have the same confidence to buy US bonds and US investors are forced to sell them, yields will only go one way. The whole concept of US exceptionalism, underpinned by long-term low rates of inflation and highly profitable corporates, looks to be under threat and many are reassessing the credibility, and creditworthiness, of the US system as a whole.

Pity then the Federal Reserve, to whom stagflation is now more of a certainty than a possibility. US CPI was softer at a recent reading, but the numbers are backward looking, and US inflation expectations are at a thirty-year high. Growth prospects have reduced considerably and cutting rates in the face of potential inflation due to supply chain disruption and higher prices for just about everything is not an easy option. The US President’s list of sycophants does not extend to the Chairman of the Federal Reserve, Jerome Powell, and the FOMC held rates at their last meeting and reduced the pace of balance sheet shrinkage (QT). The chances of fewer cuts this year than expected have risen and in his press conference Powell directly emphasized ‘uncertainty’ especially for the outlook for inflation.

EU President von der Leyen referenced ‘geo-economic uncertainty’, however we are seeing the bloc acting with more unity and cohesion in the face of this. The beginning of March saw the most volatile week in German bonds since 1990 as yields rose by 40 bp reflecting the notion that unified defence spending will be financed through sovereign issuance. The EU is showing remarkable restraint by saying they will not impose reciprocal tariffs for 90 days and they are even sitting down together and talking about it. The ECB still has an easing program to stimulate weak growth across the Eurozone but longer term a flood of rerouted Chinese goods could help contain inflation and make their job easier.

The BoE is also in a bind; the MPC remained on hold at their last meeting with an 8-1 vote. Despite an unexpected pick-up in GDP in February, our growth prospects are weak and with NI contributions and a rise in the minimum wage now in effect, with their own inflationary consequences, the room for manoeuvre is limited. The spike in our own sovereign yields does not help either, especially at the longer end, as term premium reasserts itself. The thirty-year Gilt reached 5.65%, a level not seen since 1998, as the yield curve steepened sharply causing the Debt Management Office (DMO) to pull the next long Gilt auction of £600m and switch it to shorter-dated issues. The Labour government’s defence spending plans and the disappearance of any fiscal headroom mean that the Gilt market saw plenty of volatility too. The DMO has just announced £299bn of Gilt issuance in 2025/26 after the Spring Statement was delivered by our Chancellor in her usual underwhelming performance.

Unsurprisingly, recent primary market activity has been limited. Credit spreads have widened out but only to early 2024 levels and are not signalling recession. All-in yields available in the secondary market from high quality companies are compelling but we remain highly selective.
 

The full Quarterly Review is available here. 

April 2025

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