Words: 1,215 Time: 6 Minutes
- Bond yields are surging – so who is dumping US debt?
- Are we closer to making a market bottom? There are some good signs
- I feel more confident buying quality today vs three months ago
Markets are wrapped around the axle on Trump’s (moronic) tariff war.
The latest news is China has slapped an 84% tariff in response to Trump’s 104% tariffs.
China won’t go gently. They will play the long game.
Nor should we underestimate their willingness to fight.
The two countries are now embroiled in a full-blown trade war – nothing good will come of this.
Tariffs are a zero sum game.
Trump’s playbook is straight from the script “Dumb & Dumber”... and markets are letting him know.
But good luck trying to tell him.
Now it’s not just tariffs investors are trying to calibrate… we have sharply higher interest rates.
Whilst its equities which generally steal the headlines (swinging 6-7% daily) — the US 10-year yield is spiking to levels not seen since November last year.
Think about it:
Not only is Trump wanting to raise the price of almost everything we consume (i.e., tariffs are nothing more than a tax consumers pay on goods) – he’s now indirectly raising the price of money via higher rates.
Bond Yields Rip Higher
With all eyes glued on equities – bonds are also experiencing an incredibly aggressive selloff.
Below is the daily price action on the 10-year yield:
April 8 2025
In the space of 3 days – we’ve seen the US 10-year yield surge from 3.8% to 4.50%
For those less familiar, bond yields rise when investors sell bonds.
Yields trade inversely to their price.
Therefore, who is dumping US treasury debt?
Could it be China?
Now according to the US Treasury, in January, China held US$761B in US bonds.
This was second only to Japan (which holds more than $1T) and ~10% to 12% of all foreign-held US government debt.
Robin Brooks, senior fellow at the Brookings Institute, says the real figure is even higher – likely around $1 Trillion – after accounting for the unknown sums that China holds via custody accounts in Europe
In any case, we won’t know if it’s China dumping US debt for months.
But if they wanted to inflict further pain on the US economy – this is one way they could do it.
However, they would also be shooting themselves in the foot.
For example, if they did a bulk selling of their debt at mark-to-market – this would result in realizing a loss in the realm of $US50B or more (given the sharp rise in interest rates; i.e., sending bond prices lower)
Joe Lavorgna, economist at SMBC Nikko, argues that the share of US Treasury securities owned by China has been declining ever since data became available in late 2011, to ~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”
China is one of many factors moving the Treasury yield – and is unlikely solely responsible for the spike.
Henry Allen from Deutsche Bank, said this regarding the havoc in bonds:
“Given the scale of the (bond) 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″
There could be weight to this… as the lack of interest rate stability could force the Fed’s hand.
For example, there have been ~7 instances where stock markets tanked 10%+ in just 2 days since the 1960s.
In every instance – the Fed intervened shortly thereafter.
These are not normal times…
Is a Bottom Getting Closer?
It’s very difficult to know if we’re at or close to a market bottom.
They rarely occur over the space of weeks – it generally takes months.
But I cannot predict when (or what) the bottom will be…
However, I think the ~20% correction from the market high (6147) to the low (4834) tells me a large portion of the selling is behind us.
For example, we’re now starting to see equity exposure significantly reduced and cash levels raised.
According to Forbes on April 2:
“Individual investors’ exposure to equities plunged to the lowest level since late 2011.
The March 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%).
Last month’s drop ended a streak of 83 consecutive months with stock and stock fund allocations above their historical average of 61.0%”
This is good news in terms of working towards a bottom – as there are a lot less people left to sell.
In other words, many of the weaker hands were probably selling at the time they should be thinking about buying (and vice versa).
JP Morgan said this week this is the first time they’ve retail investors be net sellers of this dip (vs buyers)
Again, this is a very good sign when looking for signs of a bottom.
The other bit of good news was the VIX exceeding 45.
In my experience, this is when you see genuine panic in the market (further evidenced by retail traders being net sellers).
As I’ve shared in the past – when the VIX trades above 35x (and especially 45) — that’s the time you want to be increasing your exposure to stocks (not decreasing).
And whilst it generally means stocks will continue to trade lower in the coming months – that’s fine.
Finally, if we look at the technical setup – with 3 trading days remaining this week – we’re now trading in the area where I suggested traders start increasing exposure.
April 8 2025
And whilst I don’t think we’ve seen the lows – the downside risks now feel lower than longer-term upside reward.
I could not make that statement when the S&P 500 traded above ~5200 (and why I did not increase my exposure to stocks above 65% the past year or so).
But with the S&P 500 trading in a zone of 4600 and 5000 – I think quality stocks (and the Index) are now worth adding to.
Again, I would not make it a full position — but it’s worth making selective bets (e.g. the Mag 7 stocks are now worth considering – excluding Tesla)
Putting it All Together
I’m starting to feel more bullish about investing at these levels versus three months ago.
That’s a good thing…
When the market traded ~6100 – I was concerned about a meaningful correction in the first half of the year.
Regular readers will recall me citing falling momentum and extreme valuations – with the market trading at a forward PE near 23x.
However, my sentiment was the opposite of the market.
Investors were wildly optimistic – with many forecasting the S&P 500 to finish the year closer to 7,000
Given the recent ~20% correction – I’m feeling a lot better about investing for the long-term.
Sounds strange doesn’t it? For example, we have:
- Widespread uncertainty of tariffs and a fully-fledged trade war
- Stocks plunging ~20% in a few weeks;
- Bond yields spiking; and
- Increased probabilities of recession…
But for me, establishing new positions – with a 3 year timeframe – feels a lot better than it did when stocks were 20%+ higher.
However my approach is probably different to yours…
I like to buy (quality) when there is outright panic (a VIX above 45) – and sell when there is greed (e.g., forward PEs around 23x)
But that style of investing requires a contrarian mindset.