Words: 1,215 Time: 6 Minutes

• The mechanics of fear: Why bond yields are surging and who is dumping US debt.
• Inverting the panic: How to read the signs that a market bottom is forming.
• Contrarian logic: Why establishing positions in quality assets makes more sense today than it did months ago.

Markets frequently find themselves wrapped around the axle of macroeconomic shocks. Right now, it"s the escalation of global trade conflict, highlighted by massive retaliatory tariffs dominating the headlines.

History shows us that trade adversaries rarely go gently; they play the long game. When major economies become embroiled in a full-blown trade war, it serves as a stark reminder that widespread tariffs are ultimately a zero-sum game.

But investors aren"t just trying to calibrate the impact of trade barriers on corporate earnings. They are also grappling with a sudden, sharp rise in the cost of capital.

While plunging equities usually steal the front-page headlines (with wild daily swings), the real story is often found in the fixed-income market. US 10-year yields have spiked to levels not seen in months.

Think about the compounding effect: Not only do broad tariffs act as a tax that raises the price of nearly everything consumers buy, but the simultaneous surge in yields indirectly raises the price of money itself.

Bond Yields Rip Higher

With all eyes glued to the stock market, bonds have experienced an incredibly aggressive selloff.

Below is the daily price action on the 10-year yield during this recent spike:

April 8 2025

In the space of just 3 days, the US 10-year yield surged from 3.8% to 4.50%.

For those less familiar with fixed-income mechanics, bond yields rise when investors sell bonds. Yields trade inversely to their price.

So, who is dumping US treasury debt at such a rapid pace?

Speculation often turns to major foreign holders, like China. According to historical US Treasury data, China frequently holds well over US$700B in US bonds, representing a massive slice of foreign-held debt.

Robin Brooks, a senior fellow at the Brookings Institute, has noted that the real figure is likely even higher—perhaps around $1 Trillion—when accounting for unknown sums held via custody accounts in Europe.

If a major foreign power wanted to inflict pain on the US economy, dumping debt is one method. However, doing so at scale is effectively shooting themselves in the foot. Liquidating debt at current mark-to-market prices would realize massive losses in the tens of billions.

Joe Lavorgna, economist at SMBC Nikko, provides crucial historical context, noting that the share of US Treasury securities owned by China has been steadily declining for years, dropping to roughly ~12% from 30% of total foreign holdings.

"The Asian investor base has been significantly diversifying away from the US bond market for the past 14 years. Therefore, current tariff policy is not a factor."

The reality is that major geopolitical shifts trigger a multitude of factors that move Treasury yields. Henry Allen from Deutsche Bank recently summarized the bond havoc perfectly:

"Given the scale of the rout, that"s raising questions about whether the Federal Reserve might need to respond to stabilise market conditions, and we can even see from fed funds futures that markets are pricing a growing probability of an emergency cut, just as we saw during the Covid turmoil and the height of the GFC in 2008."

A severe lack of interest rate stability historically forces the Fed"s hand. For example, there have been roughly seven instances since the 1960s where stock markets tanked 10%+ in just two days. In almost every instance, the Fed intervened shortly thereafter.

Inverting the Panic: Is a Bottom Getting Closer?

During times of extreme stress, it pays to invert the problem. Instead of asking, "How do I time the exact bottom?" we should ask, "How do I guarantee terrible long-term returns?"

The answer to the latter is simple: You follow the herd. You buy when markets are perfectly priced for perfection, and you sell everything when panic sets in.

Market bottoms rarely occur over a few weeks; they generally take months to form. However, after a rapid ~20% correction, the data often tells us that a large portion of the indiscriminate selling is behind us.

We are seeing equity exposure significantly reduced and cash levels raised to historical extremes. According to a Forbes analysis of AAII data during major drawdowns:

"Individual investors" exposure to equities plunged to the lowest level since late 2011.

The AAII Asset Allocation Survey also shows cash holdings jumping to their highest level in more than a decade.

Stock and stock fund allocations fell 10.9 percentage points to 55.2%.

This is the smallest exposure to equities since November 2011 (53.1%)."

From a contrarian perspective, this is excellent news. When everyone has already moved to cash, there are simply far fewer people left to sell.

JP Morgan recently noted that during this specific dip, retail investors have been net sellers rather than buyers.

When looking for signs of capitulation, the weaker hands selling exactly when they should be buying is a classic indicator.

Another major signal is the VIX exceeding 45. In my experience, this level of volatility represents genuine, irrational panic.

As I"ve shared before, when the VIX trades above 35 (and especially into the mid-40s), that is precisely the time to start increasing your exposure to high-quality assets. Will stocks continue to trade lower in the short term? Possibly. But that"s fine. We are investing for the years ahead, not the next Tuesday.

Looking at the technical setup, we are trading right in the zone where risk/reward begins to heavily favor the patient buyer.

April 8 2025

While we may not have seen the absolute lows, the downside risks now feel significantly lower than the long-term upside reward.

I could not make that statement when the broader market was trading near its peak. But after a severe markdown, I believe high-quality, moated stocks are now worth adding to. I wouldn"t rush to make full positions all at once, but it is time to start making selective, calculated bets.

Putting it All Together

Paradoxically, I am starting to feel much more bullish about allocating capital at these lower levels than I did a few months ago.

When the market was trading near its highs, momentum was stalling, and valuations were stretched to a forward P/E near 23x. At the time, my caution was the opposite of the broader market sentiment, which was wildly optimistic.

Today, the script has flipped. It sounds counterintuitive given the backdrop:

• Widespread geopolitical uncertainty and trade conflict;
• Rapid, double-digit equity drawdowns;
• Spiking bond yields; and
• Recessionary fears dominating the news cycle.

Yet, establishing new positions with a 3-to-5-year timeframe feels far mathematically safer today than when assets were priced for absolute perfection.

My approach is simple: I like to buy quality when there is outright panic (a VIX above 45) and raise cash when there is euphoria (forward P/Es in the mid-20s).

Executing that strategy requires discipline and a deeply contrarian mindset—stepping up to the plate exactly when everyone else is walking away.