Kansas was a safe place for Dorothy, but a twister turned her life upside down. A twister dropped her into Oz, a land full of threats, forcing her to set upon a treacherous path to get home again, besieged by witches, talking trees, and poppies.
Metaphorically, US Bonds and the US dollar have just experienced a twister and landed in an Oz-like setting. Until recently the US dollar and bonds enjoyed a peaceful haven status, like Dorothy in Kansas. Now, that status is challenged. In the last week, the DXY dollar index is down 3.6%, and US Treasury ten-year yields hit 4.8% .
Will the US find a “yellow brick road” and a benevolent wizard at the end? Too early to tell.
Jim Grant, founder of Grant’s Interest Rate Observer, summed it up best.
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. “Possibly, the world is reconsidering,” he continued.
Is a policy that levies tariffs one day and removes them the next expressing competence? One might say it expresses chaos not competence. Bond and currency investors do not like chaos, never have, and never will.
Back to Oz. The wicked witch of the west was Dorothy’s biggest threat, and China could be that for the United States. The witch stopped Dorothy’s path with poisonous poppies; the Chinese could take money from US bonds and slow the US economy along its path. China is, after all, the second largest holder of US debt. In times like these you do not want your second largest bond holder selling.
Evidence that the US standing in financial markets is under threat can possibly be seen by looking at Europe. In the last week US Treasuries underperformed German government bonds (Bunds) by the most since 1989; the yield on US debt surged more than .5% and Bunds were unchanged. German bunds may be becoming the “go to asset,” the haven, a quasi Kansas.
The Euro’s move supports this assertion. The Euro hit its strongest level in three years, and has had the fastest rally in a decade and a half. A strong Euro is surprising because European ten-year bonds yield about 2.5% versus 4.43% on US ten-years. Put another way, investors are willing to “give up” more than two percentage points of yield to be away from the US dollar.
The Euro is presently around 1.13, with 1.14 being a three year high, and now there is talk that it is going to 1.20 versus the US dollar.
So, what could be done from an investment standpoint?
For starters, lowering US dollar exposure may make sense.
USTRY Etherfuse stable bonds yield 4.17% API, and EUROB yield 2.17%. At present you get 2% more yield in the USTRY stable than in the EUROB stable. For this trade to hold the US dollar cannot weaken more than 2% against the Euro. Presently the Euro trades around 1.13 versus the US dollar. If it goes down to 1.11 to the US dollar, favoring Euro stable bonds over US makes no sense.
But we have seen that the US dollar is showing weakness, and there are now predictions of 1.20. Even if it is only half that move, a move to 1.14, it is still better to be in Euro.
The US economy has a long road ahead of it, and it will probably not be paved with gold.
This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed.
