Last night, a reel came across my Instagram feed which caught my eye. There was a guy hiking through the woods, who almost stepped on an adult copperhead. The snake was coiled up in the leaves under a dead limb which had fallen across the path. Due to its camouflage, you could barely see the thing.
In general, I am not a huge fan of snakes. It seems I only ever see one of three types. Garter snakes, rat snakes and copperheads. The first type doesn’t bother me in the slightest, and I keep a respectful distance from the second kind.
As for the third, if I have something handy nearby, I have been known to expedite their journey to the reptilian afterworld. If I don’t, I get the [heck] away from the thing in a hurry. Shoot, I know a guy who spent three days in the hospital after stepping on one barefoot. No thanks.
In some ways, the “other financial markets” are like snakes in this regard. Ordinarily, you don’t really notice them. However, they can be extremely painful if you don’t watch where you step.
Over the last week and a half, all eyes and ears have been on the stock markets, understandably. The wild swings are almost without precedent. From last Thursday and Friday’s complete meltdowns to this Wednesday’s jaw-dropping rally, the volatility has not been for the faint of heart.
Seemingly lost in the noise are the strange goings on in the bond and currency markets. If not “lost in the noise,” let’s just say stocks have gotten far more ink, and leave it at that.
The Bond Market
After rallying last week while stocks were under pressure, as you might expect, the bond market has given up the ghost this week. It has been jaw-dropping. With all of the uncertainty surrounding the global economy, you would think investors would be flocking into U.S. Treasury debt, not selling it. Right?
One would think.
Historically, that has normally been the case, normally. So much so, you could make the following statement without risk of someone challenging you: “during periods of global uncertainty and/or market distress, investors are prone to purchase U.S. Treasury securities due to their perceived safety. This is known as a flight to quality.”
If that blanket statement still holds true, why has the yield-to-maturity on the 10-Year U.S. Treasury Note shot up this week: By shot up, I mean:
- Rose 18.9 basis points on Monday,
- Another 10.8 on Tuesday,
- 4.4 more on Wednesday,
- An additional 9.0 yesterday
- And, as I type here on Friday, it is up another 4.3 basis points.
All told, that 47.1 basis points over 5 trading sessions, over double-digits each day.
Regardless of the reason, that is extremely unusual.
To be sure, you could argue the so-called “flight to quality” simply unraveled once the stock market stopped falling apart. As things stabilized, even if only on a relative basis, investors simply liquidated the Treasuries they had purchased last week. Of course, when the supply of debt swamped the demand, prices went down and yields rose. Since this happened so abruptly, it took on the appearance of being unusual, even if it wasn’t.
Yes, you could argue that. Even more, you might be right, might.
However, the yield-to-maturity on the 10-Year Treasury was 4.21% at the end of March, and 4.00% last Friday. Today, as I type at 12:08 pm CDT, the yield has blown way past those levels to 4.47%. This is off the high of around 4.58% at about 10:05 am CDT. So, IF investors were simply unwinding trades from last week, why did they continue selling their Treasury holdings well past last week’s levels? All the more so since the stock markets have remained choppy, which is a polite way of putting it, all week.
Precious Metals and Currencies
Then, there is the curious cases of precious metals and the currency markets.
Everyone knows gold has been on a tear over the last couple of years. As the United States has flooded the global economy in dollars, this makes perfect sense to me. Sure, the U.S. dollar has remained strong relative to other major “trading currencies.” However, I might argue its strength has more to do with the other currencies’ weaknesses than anything else.
Even so, from last Friday’s close of $3,038.24/ounce, the “spot exchange rate” for gold has soared to $3,227.71/ounce here early on Friday afternoon. That is over 6.2%. Even more, it is up over $50/ounce in Friday’s trading alone.
Remember, this is a shiny hunk of metal that doesn’t pay a dividend or interest, and it doesn’t generate any revenue on its own. As for the dollar, 2025 had already been a relatively rough ride prior to the events of this past week.
The U.S. Dollar
The U.S. Dollar Index (DXY) on Bloomberg tracks the strength of the U.S. currency relative to other major, convertible global currencies. The current weights are as follows: euro 57.6%, Japanese yen 13.6%, British pound 11.9%, Canadian dollar 9.1%, Swedish krona 4.2% and Swiss franc 3.6%.
The value of DXY was 108.487 at the end of 2024. It was still 107.614 at the end of February, and starting trailing off in March as the talk of tariffs started heating. It closed the quarter at 104.21, and last week at 103.023. As I type at 12:34 pm CDT on Friday the 11th, it is 100.148, after bottoming out at 99.014 at 1:49 am CDT this morning.
As is the case with both the 10-Year Treasury and gold, that is a significant move in the strength of the U.S. dollar in a contracted period of time. To be sure, the dollar has been weaker in the past. So, this recent dip doesn’t necessarily represent a panic. It is simply curious.
Further, it begs the question: “what will happen to the U.S. bond market if the foreign demand for dollars continues to weaken?”
Intuitively, bond prices will continue to fall. This means interest rates, or the cost of capital in the U.S. economy, will continue to go up. After all, the bond market isn’t immune to the law of supply & demand. If there are fewer foreign investors demanding dollar-denominated securities, asset prices will fall until they reach a new equilibrium where supply equals demand.
It isn’t terribly complicated, but is this, in fact, happening? One week certainly does NOT a trend make. However, the events which triggered this week’s strange behavior are extraordinary.
- Political leaning(s) aside, last Wednesday (4/2) afternoon, the U.S. President essentially declared a trade war on the remainder of the global economy. As we all well know, some countries got the whammy worse than others. However, everybody got something.
- Then, this past Wednesday (4/9) afternoon, the President called for a 90-day ceasefire for everyone except China.
To say the Administration’s trade policy seems to shift with the winds would be an understatement. Further, to say Washington doesn’t appear to completely understand how tariffs work would also be an understatement.
Couple the two together, and you could very easily have a decrease in global confidence in the U.S. economy and its leadership.
But why do I say Washington doesn’t appear to understand how tariffs work is an understatement? The reason being is tariffs don’t directly punish the exporting country. Period.
If the Administration places a 100% tariff on Chinese-made goods, Beijing certainly doesn’t pay it. Chinese manufacturers don’t either. Americans pay it.
You see, a tariff is a tax which the importer must pay, not the exporter! For instance, if U.S. retailer XYZ buys $1 million worth of items from Chinese manufacturer ABC, it pays the Chinese company the yuan equivalent of $1 million AND it pays the U.S. tax of $1 million (the 100% tariff) to Washington. Seriously. Trade attorneys might tell you there is more to it than that. However, that little definition is more than adequate for tailgate conversation.
How this is thumbing the nose to the Chinese is anyone’s best guess other than it could reduce the demand for Chinese imports moving forward. Until such time, U.S. companies and consumers are paying the tariff. That means either reduce profits, higher consumer prices or a combination of the two.
Essentially, Washington can’t impose a direct tax on the Chinese any more than Beijing can impose a direct tax on Americans.
As such, IF the U.S. President is willing to saddle U.S. businesses and consumers with increased taxes in an attempt to throttle foreign manufacturers, it isn’t terribly surprising foreign investors might be losing a little confidence in the U.S. system.
That might not be a popular thing to say, but how would you feel about the British, Canadians, Mexicans or even the Chinese if they were to do the same thing? Put a high tax on their domestic consumers and businesses?
In the end, sometimes those things which you can’t easily see are the ones which will hurt you the most. It could be a copperhead in a clump of fallen leaves, or it could be a sharp decrease in the demand for U.S. dollars.
Of course, copperheads almost always scatter when they sense you coming and, until there is a good replacement, foreigners will continue to demand dollars.
So, hopefully, this too shall pass.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.