There has been a wholesale retreat from American asset classes.
China has retaliated against the latest retaliation from the U.S., increasing its tariff on U.S. goods from 84 percent to 125 percent.
After a brief setback, gold had already resumed its upward path and is trading at around $3,217, up nearly $900 more than a year ago and about 10 percent higher than a month ago.
Earlier this week, I noted a report describing the unusual way in which certain assets had been performing. When stocks (as an asset class) fall on bad news, that is typically mirrored by a rise in Treasuries, as investors look for a safe haven. But that did not last long this time, suggesting that the allure of U.S. government debt has been reduced by the administration’s bizarre tariff adventure. Adding to the pressure, institutional investors (buffeted perhaps by margin calls, clients redeeming their positions, or both) were dumping liquid assets, such as Treasuries and gold. However, gold picked up again, while Treasuries kept falling.
Yesterday, Dominic Pino discussed an article by the Wall Street Journal’s Greg Ip, in which Ip suggested that gold was becoming the safe haven of choice. The dollar has been weakening against a number of currencies. That will also (typically) mean that it costs more dollars to buy an ounce of gold. But on top of that, there is also increased demand for gold (for example, its price has increased in euros), adding to the upward pressure on its price in dollars.
Meanwhile, if treasury yields are rising, that increases the fiscal pressure on the U.S.
Pino:
Net interest costs are already the third largest category of federal spending, after entitlements and defense. It is expected to surpass defense soon. The Congressional Budget Office assumes generally low interest rates for government borrowing when it makes its long-term projections…
With no appetite or plan for real deficit reduction, the government needs to be able to count on people still being willing to buy Treasury bonds at favorable rates. If that goes away over these tariffs, things will get much uglier much more quickly than they are already expected to be for the federal budget.
Under the circumstances, it is somewhat ironic that the fiscal deficit is the underlying cause of the U.S. trade deficit. In attempting to tackle the trade deficit in the way that it has chosen to do so, the Trump administration may well have made the fiscal deficit worse.
4d chess? Nope. Just an administration that has chosen to shoot itself in both feet at once.
And if the perception of Treasuries as a safe haven fails to recover, the consequences will be grim.
As the world’s ‘risk-free’ asset, Treasuries are used as a benchmark to determine the price of everything from stocks to sovereign bonds to mortgage rates, while serving as collateral for trillions of dollars of lending a day.
Treasuries and the dollar get their strength from “the world’s perception of the competence of American fiscal and monetary management and the solidity of American political and financial institutions,” said Jim Grant, founder of Grant’s Interest Rate Observer, a widely followed financial newsletter. “Possibly, the world is reconsidering.”
Grant is not known for his sunny optimism, but he’s right to sound the alarm. That said, I suspect that (in the absence of any descent into total insanity) when the world has completed its “reconsidering,” Treasuries will still be seen as a safe haven, but not, perhaps, as quite as safe as before. Recovering their old luster will take time.
On Thursday, as Bloomberg notes, there was a wholesale retreat from American asset classes: The yield on thirty-year treasuries reached 4.87 percent (German government debt seems to be attracting some of the flight capital), and the dollar fell by more against the euro (against which it has hit a three-year low) and the Swiss Franc that it had for more than in the decade.
For his part, Trump described the bond market as “beautiful.”
It’s a view, I suppose.