One week / one topic: Sticks and carrots

What happened?

As President Trump’s tariff announcements keep coming thick and fast, he seems busy cementing the legacy of one Henry Kissinger: “America has no permanent friends or enemies, only interests”.

Maybe so, but – as many countries have learned the hard way throughout history – sovereignty is ultimately limited as long as you need to borrow money from foreigners.

(Which – by the way – might not be a bad thing after all, if it prevents war breaking out between debtor and creditor nations…)

Wait… are you saying that you can be US President and not be able to do anything you want, just because you owe people money? Say no more… I’ve got just the right man for the job!

Enter Treasury Secretary Scott Bessent, the big time hedge fund honcho who’s lately been busy telling anyone who’ll listen that US Treasury yields are not gonna go up.

Rates strategists apparently believe him (or are hedging their bets) and indeed year-end yield forecasts have been coming down, in a sign of the robust re-emergence of the ‘Treasury put’ narrative.

(But beware rates forecasts, as per below…)

While I would publicly challenge the assumption of any clear link between the US Treasury’s actions and what happens to 10-year yields – there are many more significant factors that can affect this, firstly what investors perceive to be the path for economic growth – this is indeed something that needs to be priced in.

Not only Secretary Bessent bring as much markets credibility as anyone to the role, the US Treasury is extremely well-advised with regards to its borrowing plans.

Given the all-important nature of US 10yr yields for financial markets more broadly, what should investors then make of all this?

Our observations

• Fundamentals: Good luck forecasting the ‘fair value’ for 10 year US Treasuries… All we can say with any confidence is that at these levels they still look a lot less expensive than US stocks.

• Price action: After a few years of high rates volatility, recent yields movements stand out for the relative calm. Can it last? If not, which side do you want to be on?

• Investor beliefs: The US Treasury might indeed be the Eye of Sauron… No wonder few want to take it on.

So what?

Perhaps the most consequential conclusions that markets – and foreign leaders – have drawn so far from observing Trump’s actions are that:

1. Might makes right

2. There is always a deal to be done

With regards to the first point, one just needs to look at what’s happening in Turkey: markets reacted sharply at first but then – at least for now – things seems to be calming down on the FX, bonds and CDS fronts.

Perhaps a recognition of how who holds the cards here, as per Trump’s parlance?

As to the latter, the shock and awe approach to the much-Trumpeted™ trade tariffs to be imposed on “Liberation Day” April 2nd… seem to be ending up in an anticlimactic range of concessions and carve-outs?

While our heads keep spinning trying to keep track of all this, we want to remain disciplined and avoid chasing the latest headlines…

After all, tomorrow is another day.

Mood music: Sister Sledge – He’s the Greatest Dancer