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 led to a wave of selling in US treasuries to raise cash, especially in 10 year and 30 year bonds and yields spiked higher, bid offer spreads doubled and liquidity evaporated. The US treasury market also suffered from a general loss of confidence in the USD and America Inc. Possible foreign selling of UST’s may have intensified the rout. 

Bear in mind that this is now a $36Tn problem (US debt has doubled from $18Tn in the last decade). The dollar remains the reserve currency and therefore UST are the worlds risk free asset. However, if there is a buyers strike and foreign investors do not have the same confidence to buy them and US investors are forced to sell them, yields will only go one way.

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 number is backward looking and US inflation expectations are at a 30 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 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 pursue 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. 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, their room for manoeuvre is limited although a cut is expected at their next meeting. The spike in our own sovereign yields does not help either, especially at the long end, as term premium reasserts itself. The 30 year Gilt reached 5.65%, a level not seen since 1998, as the curve steepened sharply causing the DMO to pull the next long Gilt auction of £600MM and switch it shorter.

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 very compelling. 
 

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