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Week ended April 11, 2025: Bonds speak the truth

  • Writer: tim@emorningcoffee.com
    tim@emorningcoffee.com
  • Apr 12
  • 6 min read

Week ended April 11, 2025

 

“Even if this dynamic was to fade as swings in stocks eventually normalize, as most analysts expect, a message has been delivered to policymakers in Washington: Investor confidence in US bonds can no longer be taken for granted — not after a years-long borrowing binge that swelled its debt load and not with a president in the White House hell-bent on rewriting the rules at home and abroad and antagonizing, in the process, many of the country’s biggest creditors.”

 

“There is real pressure across the globe to sell Treasuries and corporate bonds if you are a foreign holder,” said Peter Tchir, head of US macro strategy at Academy Securities. “There is a real global concern that they don’t know where Trump is going.”

As is often the case, the bond market is the “adult in the room”.  The days since Mr Trump’s “Liberation Day” announcement of blanket tariffs for friends and foes alike have seen volatility spike in the stocks and bonds simultaneously.  Equities – not just in the US but globally – have more or less been on a one-way street lower, although a good session in the US on Friday meant that US stocks ended the week higher for only the second time in the last eight weeks. Since the day before “Liberation Day” (April 2nd), the S&P 500 is down 6%, with virtually no stock or sector spared.  It could have been much worse, had Mr Trump not capitulated and reversed course on blanket tariffs, providing a 90 day reprieve for most countries to negotiate before the new tariffs would become effective.  The exception is China, which remains locked in a tit-for-tax escalating trade (tariff) war with the US.  Although the imposition of the “Micky Mouse” list of tariffs has been deferred, the initial 10% tariffs across the board remain in place, along with the 25% tariffs on certain goods from Canada and Mexico, as well as on steel and aluminium imports.  Although the S&P 500 was down intraday on Wednesday at its lowest by nearly 13%, Mr Trump’s capitulation mid-session led to one of the largest intra-day rallies in US stocks on record.  What almost certainly convinced Mr Trump to throw in the towel on his bizarre tariff announcement one week earlier was not the decline in stocks, but rather disorder in the US Treasury bond market, which had become unusually volatile as Treasuries faced growing selling pressure. 

 

The reality is that although stock market moves grab headlines, they are a sideshow in difficult times to the bond market.  Investors (and I am near the top of the list) bemoan their 10%+ (unrealised) equity portfolio mark-downs, which hurts, but this pales in comparison to the damage that has been progressively inflicted in the bond market.  Keep in mind that it is the US Treasury bond market that enables the US to operate indiscriminately –at least in the past – with such a poor financial balance sheet, since the mighty US Dollar and the ultimate “risk free” US Treasury bond market is the global “go to”, especially during “risk off” periods.  However, Mr Trump’s errant fiscal policies are rattling global bond investors.  It is unusual in the first instance to see bonds and stocks travel in the same direction.  Normally, when investors are fearful, they move out of stocks and into “safe haven” bonds.  But now, US Treasuries are losing their lustre, and it appears that investors are dumping the (formally) safest of global risk assets, US Treasuries.  The decline in the stock market is one thing, but the ramifications of foreign investors puking US Treasury bonds could be much more profound.

 

I am not going to go into further detail in this update, but the table below might help you understand what is happening. $8.5 trillion US Treasury securities (nearly 30%) are held by foreigners, and collectively this group of investors allows the US to run its large trade deficit that fuels its consumption-driven economy.

As confidence in the US diminishes and uncertainty prevails, both US and foreign investors are suggesting that they are losing faith in the US Dollar as the global reserve currency and in US Treasuries as the ultimate global safe haven asset.  Investors simply do not like uncertainty, which Mr Trump is serving up in droves.  On Friday, the governor of the Boston Fed Susan Collins did say that the Fed would be willing, as is normally the case, to step in and provide liquidity should the US Treasury bond and interbank lending market seize up.  This also soothed investors somewhat, although the damage to the US as far as reliability and predictability has been done.

 

WHAT MATTERED LAST WEEK

As far as economic news, CPI for March in the US (BLS release here) came in slightly lower than expected which encouraged investors that the Fed might act sooner than expected.  However, bond yields are saying something differently as both higher inflationary expectations and supply-demand factors overwhelm the increasing likelihood of a US recession, pushing yields higher. 

 

The University of Michigan consumer sentiment survey was released Friday.  It indicated that consumer confidence has fallen to the second lowest level on record, and that inflation expectations rose to multi-decade highs due to concerns about price increases related to tariffs.  What can I say except “duh”?


Earnings also started last week, with two large US banks delivering good results for 1Q2025 but serving up a load of uncertainty about the path forward.  Many companies are expected to revise their guidance down, and some might not provide guidance at all given the heightened uncertainty.  Good sites at which you can track aggregate S&P 500 earnings include “Earnings Insight” (FactSet) and “S&P 500 Earnings Scorecard” (LSEG).  For following individual companies and the earnings calendar, I suggest you use EarningsWhispers.

 

MARKETS THIS WEEK

Stock markets were all over the place this week, although Wednesday’s reversal into some of the largest intraday gains I have ever seen was truly impressive.  The catalyst was Mr Trump’s decision, after he had said it was a great time to buy stocks earlier that morning (??), to defer the imposition of tariffs for 90 days.  The relief rally that followed caused stocks to soar off of lows, with the S&P 500 ending the day higher by a nearly unprecedented 9.5%.   You can see in the graph below what happened, with stocks gapping higher just after Mr Trump’s announcement around 1pm on Wednesday.


The VIX (volatility index) remains highly elevated, closing Friday at 37.56, showing we are a long ways from out-of-the-woods just yet.  Aside from US stocks, most non-US equity indices lost ground last week, reflecting that they will be on the receiving end of more stringent and unpredictable US trade policy.  Corporate credit spreads were also higher, suggesting “risk off”, and gold was up another 6.2% WoW.  Let me repeat what I said near the beginning of this update: “the bond market is the adult in the room”, so bonds are the best indicator of the direction of travel of the US economy.  As an investor, keep your eyes open on the basis that global investors are much more likely to speak the truth than the Trump administration. 

 

See section “Market Tables” below for an update across indices and asset markets.

 

MY TRADES LAST WEEK

The conditions were perfect in the second half of Wednesday’s rally to write short-dated covered calls, which I did albeit slightly too early, on MSFT, AAPL and CRWD.  I also added more SPY puts for downside protection, as I see the recent declines as far from over.  I hope I am wrong, but downside protection in this environment is insurance worth paying for.

 

WHAT’S AHEAD

Economic data that matters this coming week includes March CPI / PPI and March retail sales for the UK, 1Q GDP and March retail sales from China, March CPI for Japan, and March retail sales for the US.  There are also a slew of Fed “talking heads” on the circuit this week.  The ECB has a monetary policy meeting this week, and both the decision and the post-decision commentary should be telling.  The ECB is expected to reduce its policy rates by 25bps because of an increased likelihood of an economic slowdown related to higher US tariffs.

 

Earnings for S&P 500 companies continue with 33 S&P 500 companies set to report earnings this coming week, including GS, BAC, MS, C, JNJ, ASML, TSM and UNH.

 

Upcoming central bank policy meetings are as follows:

  • ECB: April 17 (expect to lower policy rates 25bps)

  • Bank of Japan: April 30-May 1

  • FOMC: May 6-7 (no reduction in Fed Funds rate in May expected, but three 25bps reductions expected this year)

  • Bank of England: May 8

 

MARKET TABLES





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