April 17, 2025
The US 10-year Benchmark rate jumped by 50 bps in just the 5 days from April 7th to the 11th. That is a very unusual and humongous move in such a short period of time. The question is, why would that volatility occur in the context of a slowing economy, which has always brought out buyers in the past?
I wrote a book predicting the eventuality of this current bond market debacle back in 2013. The book’s prediction of a bond market crash was based on the pathway toward US insolvency and the destructive inflation that runs concomitant with intractable debt. Inflation has already been above the Fed’s 2% target for the past 4 years, and tariffs are now exacerbating it. And our nation’s debt is now a staggering $37 trillion and equal to 123% of GDP and 720% of Federal revenue. On top of this, Washington is trying to extend Trump’s 2017 Tax Cut and Jobs Act, projected to add $4.5 trillion to the deficit over the next decade. Annual deficits were already projected to be $2 trillion, assuming the TCJA sunsets in December of this year. However, if extended, they will now be closer to $2.4 trillion annually, assuming no recession, low inflation, and even lower interest rates prevail. But alas, the trade war between China and the US has set off a chain reaction in the bond market, causing yields to spike.
Global trade is collapsing as a direct result of tariffs. Hence, there will be a smaller trade surplus on the part of our creditor nations to recycle into Treasuries. Also, China is most likely selling US debt and then selling USD. But instead of exchanging those dollars for Yuan, they are converting them for gold. The direct evidence of this trade can be found in interest rates rising, just as the dollar is plunging and sending gold to record highs. Without China, Japan, and other foreign investment in our bond market, the US will struggle mightily to find enough domestic buyers (excluding the Federal Reserve) to supplant those bids.
Also, Hedge funds have been heavily engaged in reckless investment strategies that involved being long Treasuries with 100:1 leverage.
And we can’t leave out the largest foreign holder of US debt, Japan. Long duration Japanese Government Bonds are spiking at an even faster pace than that of the US. For example, the Japanese 10-year note has surged from .22% in October of 2022 to 1.5% just a few days ago. Whereas the US benchmark rate is trading just a few bps higher than it was two and a half years ago. This means the domestic Japanese investor has, for the first time in nearly a decade and a half, a viable alternative to owning US bonds.
But perhaps the most important reason for the chaotic trading of US treasuries is the lack of liquidity. The Reverse Repo facility, where banks’ $2.5 trillion of excess reserves once laid fallow and collected interest at the Fed, has been pouring into the bond market for the past two years. That enormous amount of credit was readily available to purchase Treasuries but has now dwindled to just $88 billion.
The credit market chaos is just one example of the dangerous leverage in the financial system. But what else would you expect when nominal interest rates were close to zero, and real interest rates were negative for most of the 15 years between 2008 and 2023. There is no timeframe in US history that comes close to this decade and a half deformation in the cost of money. Of course, we do have the history of those six years between 1974 and 1980 where real rates were negative, and that led to that infamous economic period marred by stagflation.
Today’s credit crisis will not remain in the Treasury complex alone. Today’s banking system is also chock full of leveraged loans, CLOs, Private credit, Junk bonds, RMBS, CMBS, and FHA loans, which are the new subprime mortgage crisis in waiting, jumped by 1000% since the GFC.
The inflation-ravaged consumer is not getting any relief from cheaper money. In past recessions, the amelioration process for markets and the economy has always rested on much lower interest rates. But this time around, they are getting no relief from the Fed. Indeed, Powell crashed the market today by 3% on the NASDAQ and 2% on the S&P when he said tariffs are causing a dilemma on rate policy. Therefore, “For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance.” In other words, he told the stock market that for now, you are on your own.
This is why the University of Michigan’s April Consumer Confidence survey fell to 50.8 from 57.0 in March. That was a drop of -10.9% m/m and -34.2% y/y. Meanwhile, the year ahead, consumer inflation expectations surged in this survey from 5.0%, to 6.7%, which is the highest reading since 1981. Also, Consumer Expectations about personal finances are now at the lowest level on record. Consumers are frightened about inflation and the stock market, according to the March Federal Reserve Bank of New York survey. And, they are now growing very concerned about the labor market. The probability that the unemployment rate would be higher a year from now surged to 44%, a move up of 4.6 percentage points and the highest level going back to the early Covid pandemic days of April 2020. Consumers are also realizing that the real estate market is rolling over. In fact, the ratio of home sellers cutting the offering price as a percentage of total listings is now at a record high, just as active listings are up 30% year over year.
Investors need to have a long/short strategy using cash, stocks, bonds, currencies, and commodities to allocate between economic cycles that swing between inflation and deflation. It is far better way to invest than the buy and hope you don’t end up looking like a dope plan offered by most Wall Street institutions.
Michael Pento is the President and Founder of Pento Portfolio Strategies, produces the weekly podcast called, “The Mid-week Reality Check” and Author of the book “The Coming Bond Market Collapse.”