Is everyone (including us) too bearish on US Treasuries?
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Welcome to the Saxo Market Call. Before we get started, it's important we emphasize that the views and opinions expressed in this podcast are those of the host and guests and do not constitute investment advice or recommendations. All information provided is for educational and entertainment purposes only.

All right. It is Friday, 23rd of May, 2025. And walking into the studio with actually far more to say than I anticipated this morning. And I was glad I'm a little bit late getting in here because I was privy to a great conversation with some of my former colleagues and good friends on a macro chat we have going back and forth. And

Gave me some perspective that I think I'll lead off with here, and that is, you know, we're looking at where the U.S. Treasury markets are. They've been pressurized, these yields up to the very key levels, 4.5% plus on the 10-year and the 5% level in play this week at the very long end after that week Treasury auction. This week, we know we have this big, ugly bill coming through Congress. Don't know the final form of that, what the Senate will come up with in terms of maybe some tweaks to it. We have...

at least three senators that are probably not on board at all with the current makeup, and another one, Josh Hawley, making noise on some of these Medicaid cuts or limits. So,

We don't know what that final form of the bill will be, but we do know the general outline here. It's going to be another deficit-busting bill. We don't know if these tariffs are going to provide much of an offset. The most optimistic you could say, quote-unquote optimistic, because it might guarantee a U.S. recession, would be something like 15%, being the final landing point for tariffs, which is, according to my calculation, more or less 1.5% of GDP growth.

if that is collected on the scale of trade we saw, for example, in 2023, which is the last data point I picked up there. Long story short, a cut to the chase. Everybody is, and nearly everybody, I should say, but overwhelmingly bearish bonds. What if everything, there's some apocryphal quote of Mark Twain's, it's like the most painful thing, it goes along the lines of something like,

the most painful thing in the world is when everybody knows, is absolutely certain about something and that thing is just not true. Butchering of the quote, but

Everybody knows we're supposed to not be in bonds. There are a lot of people, they're short bonds. Wouldn't it be interesting if it's time to get contrarian simply for, because sentiment is too excessive. Yes, I'm also bearish bonds for the long term, but it is a very expensive thing to be short bonds. You're paying negative carry. Is this too much of a consensus trade? Does it risk a squeeze and a backup? I think it's quite interesting that the price action and some of the

If you just look up the Treasury's chart, 10-year, 30-year, et cetera, it could be interesting to see whether we are set for some kind of squeeze in that market. And then if we are, and this is all speculating, of course, this is not a trade recommendation or an investment recommendation, what would be the fallout in other places in the market on FX? The idea could be that, hey, this means that the U.S. Treasury market is short up. After all, therefore, that's $1.

dollar bullish. I'm not so convinced. I think the Dalian bears would love for U.S. yields to back off. It would also likely help the Japanese government bond market as well if we saw U.S. yields reversing and heading lower. But I just want to start off the program with just teasing the thought. Wouldn't it be a hilarious, hilarious

Not for these – because people will be losing money but hilarious because the consensus is just so overwhelming that everybody needs to short bonds that we just see them rally like stink here into the – ahead of or maybe just after but ahead of possibly a long holiday weekend for both the UK and the US where it is a Memorial Day holiday.

All right, some other bits and pieces to talk about. So yesterday, those jobless claims, once again, very low and in the range. Maybe slightly interesting that we saw the continuing claims above 1.9 million for only the second time for the cycle. But we need a string of three, four data points of saying not just continuing claims, but the jobless claims to rising further to get some kind of coincident indicator on.

that the labor market is weakening here. By the way, coincident versus leading, look at those chart in yesterday's slide deck. And if you didn't have a listen, we had a nice long form podcast yesterday and got some good listenership to that one. So have a listen there as well. And a little on the calendar for today. I ran down the calendar for next week a little bit yesterday. I

And it's also in my FX update, which I will provide a link to in the podcast description. A couple of geopolitical notes. So, of course, we've got Iran-Israel tensions and back and forth on that. No idea where that is going, but it's just something to monitor. But an interesting one pointed out yesterday was that there was originally an announcement, for example, that Malaysia was –

Not for example, but Malaysia, the government was looking to launch some kind of sovereign AI effort linked or that would be built on Huawei technology, powered by Huawei's, of course, of China, Huawei's chips. It has since backed down from that because many were saying that, of course, if they did so, this would get it in hot water with the Trump administration. So just interesting to see even an economy that is very much a satellite economy of China is sufficiently concerned to do

to move away from something like this. And as well, I think also a very key signal in the geopolitical game here, the G7 finance ministers meeting yesterday, producing a statement that was really, really interesting because of what we can infer from it. So it's along the lines of the quote that, that officials are that the, the group of seven nations pledging to address quote excessive imbalances, unquote, in the global economy. The most interesting part though, was, uh,

There was this bit from a Bloomberg article saying, officials said that there was a need for a common understanding of how, quote, non-market policies and practices, unquote, undermine international economic security. And then they agreed, quote, on the importance of a level playing field and taking broadly coordinated approach to address the harm caused by those who do not abide by the same rules and lack transparency, unquote. So you're getting a very strong sense there of,

Of who they're talking about. It's never explicitly stated, but it's clearly pointed at China. So an interesting one there. And we'll see how that works into some of the trade agreements, which are really not really going anywhere. We have the EU and the U.S. not really even able to get off to a starting point because the U.S. wants the EU to unilaterally drop its 20 percent tariffs or else the U.S. will do reciprocal tariffs before they even discuss anything.

And there's also – Europe is refusing to use the digital services tax as far as I understand it at least as a negotiating point even in these trade negotiations. And we still haven't heard from where – how Japan is doing. We have – of course, they're very concerned about their automotive sector, a key foundational block of the Japanese economy.

and its export economy, Japan and Washington today. And here we are, you know, halfway into the 90-day suspension period for these tariffs. And who knows where we are with China. I haven't heard much of an update of any kind there.

Okay, one other thing on the sort of stability of the system front, things that have disturbed the market in the past and the Supreme Court ruling basically that the Trump administration could fire a couple of officials. I'm forgetting which agencies they were sort of cleared the move by the Trump administration to fire the heads of, but they're basically saying you can't touch Trump.

Fed officials. And that was an interesting one. Maybe removes that for now as a point of concern for the stability of the system and the US dollar, et cetera. And I really haven't started off by talking about where markets were yesterday. I think worth noting, we saw a bit of back and forth in the major US exchanges yesterday, but some signs of, and we're coming in decently in terms of risk appetite here into Europe. I saw the

European equities were rallying quite nicely this morning, but some signs in the U.S., at least, of a bit of that lack of breadth. We're seeing weakness in some of the value segment, and the equal weight S&P has underperformed quite a bit. So maybe some marginal concern there. We still have some decent gaps to close, as we've been talking about in recent weeks.

episodes that there's some room to the downside before you even start to get worried and some gaps to close. 20,000-ish plus maybe a percent on the NASDAQ 100 and the S&P areas I've mentioned before. But not much to add there. I think there was an interesting note that I saw on Bloomberg that a significant player has put a $3 billion nominal or notional

Bet on call options, not the value of the underlying, but the actual trade sizes and $3 billion that they suspect is the same player in the market. Buying basically QQQ and SPY options long term for somewhere out in 2027, but also three names that were mentioned in that article were Salesforce,

Amazon, basically at the money call options, and Arm Holdings, $800 million bet on Arm Holdings, somebody putting on there. So for what it's worth, somebody out there in size is bullish on the U.S. equity market. Another interesting story in crypto land was an exchange, Kraken, looking to potentially list tokenized U.S. stocks and ETFs, including SPY, on its stock.

On its network, somehow using the Solana infrastructure to do so. No idea where this could be headed, but something to watch. It would allow people to trade basically tokenized securities around the clock and, of course, through the weekends as well.

Crypto has been a decent advanced indicator on risk sentiment. It has just achieved new highs. So I think broadly speaking for risk sentiment, that move now needs to hold and really be a setback, I think, for sentiment there if suddenly you've got a reversal, for example, in Bitcoin back below the old highs. Yeah, and then in FX, as I pointed out in my FX update,

It's interesting to note the patterns across time zones and how the U.S. dollar and to some degree the Japanese yen have been doing. I put up a pretty cool chart, at least I thought so, showing that in my FX update. You can find the link again in the podcast description. We seem to kind of back up often, back up meaning the dollar-yen sort of rallies or stays flat in the North American session, and then Asia comes in and just sells dollar-yen.

almost every day of late. So is it a pattern that continues? I think for those believing that Dalian is supposed to find some upside, you would need to see Asia maybe stop doing that and to find some downside, maybe that this pattern continues.

It could just continue and the impulses get larger, but I would say that at least the buying stops in the North American session would be a help. But Eurodollar is somewhat similarly. And we saw kind of a – it looked like Eurodollar was going to survive the 113 area yesterday when we recorded the podcast. And immediately when I bent back to my seat, it was dropping all day long, hit 112.56 low yesterday.

And then it rallied just like the dollar yen sold off. Eurodollar rallied in the Asian session and were a nice and high back web of 113 again. I think it would certainly help the bullish sentiment in Eurodollar to see it stick a big rally. But my overall, I think most interesting market continues to be the US treasury market. And I'm fascinated if we do get that rally and yields get crushed in the US, the knock-on effects, I think that would be –

I think the gold would be challenged by such a – the gold rally would be challenged by such a development. I think dollar-yen, my instinct would be to say that it performs – that it drops quite strongly. But gold and Swiss franc have been kind of interchangeable of late. To what degree is Swiss yen something that's interesting to sort of take out the whole dollar part of the equation? Swiss yen falls because Swiss is so gold-oriented. If you want to express a gold view somehow in the foreign exchange market –

I don't know. I think the U.S. treasury market is the one to watch, and it will reveal if it does rally how the currency market will treat that. I don't in any way – I'm not looking anyway at my longer-term bearish view on the dollar to be shaken, but I'm certainly open-minded if we somehow get a –

a rally here and a strong one that takes out, let's say one 12 and you're a dollar that we're going to be, you know, the dollar bears are going to have to be walking in the desert for a bit longer before they find some new, uh, new situation to, uh,

and new support levels or new resistance levels from the dollar point of view to trade off of. All right. Maybe a bit of a back and forth and confused thoughts there, but I think it feels very pivotal, this market, and looking for a new impulse. And I think that impulse might come from the U.S. Treasury market. Let's see. Have a great weekend when you get there. Stay very careful out there, and we'll be back next week with a Saxo market call.