US Deficit Concerns Spur Wall Street Selloff
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Welcome to the Daybreak Asia podcast. I'm Doug Krisner. The bond market was rattled in the last session by worries over the federal budget deficit. It's been a major theme all week, beginning with that Moody's downgrade. Today, the sale of $16 billion in 20-year bonds saw lackluster demand. We're talking about a 5% coupon rate, the highest since the 20-year was reintroduced back in 2020. Here is Gina Martin-Adams from Bloomberg Intelligence.

It's just really difficult to justify owning bonds in that kind of environment to the degree that you would have yesterday, the day before, a year ago. And that certainly is creating some risk, peripheral risk to the equity market. That is Gina Martin-Adams from Bloomberg Intelligence. So we saw yields spike right across the Treasury curve today. The 10-year was up 11 basis points to just under 460.

and those higher yields in turn sent stocks lower. In a moment, we'll take a look at today's market action and reaction with Rebecca Walzer. She is president at Walzer Wealth Management. But we begin in the Asia-Pacific. Joining me now is Joe Little. He is the global chief strategist at HSBC Asset Management.

Joe, joining from our studios in Hong Kong. Joe, thank you so much for making time to chat with me. Can you take me inside the HSBC Asset Management morning meeting? How much consensus is there right now? I know there are so many different points of view. It's a very mercurial world that we're living in right now. Is there much in the way of consensus in your shop?

Yeah, I mean, that's a great question. And you're quite right, because we're living in unusual times, ultra high policy uncertainty, many different dimensions to the investment market equation at this point in time. So we tend to run an approach to think about investment markets based around scenarios.

And normally, we like to have three scenarios in mind. Juggling more scenarios than that becomes quite difficult mental exercise. And it means then you've got less time to really kind of develop and think about what the data flow and investment market action might look like under different scenarios.

The central theme that we've had is what I call spinning around. So lots of policy uncertainty, high volatility in markets, a big challenge to U.S. exceptionalism, rotation into other global stock markets, policy support in Europe and China, and a situation then where the rest of the world equities, EFI equities can outperform the U.S.

But clearly with the tariffs, with the Doge fiscal agenda to a degree as well, some of the themes around immigration policy in the U.S., there's a left-hand scenario which we've been also highly attuned to, particularly colleagues in the fixed income area, highly attuned to this idea of

big challenges around the growth inflation mix, recession worries elevated still. And that has a slightly different set of prognoses in terms of how investment markets then behave. And on the right-hand side, investors in our equity area, more growth-focused investors still want to think about technology and the importance of AI, which

is the most positive, most bullish scenario in the chessboard. And again, that would have a slightly different set of consequences for markets as we think through the scenario. So we like to think in terms of that framework,

And most of our discussions are focused on a central scenario of spinning around lots of volatility, but a way forward for markets over the course of the next 12 to 18 months. Or a more adverse negative scenario, worries about recession risk being a big feature of a lot of our conversations. And, of course, we're tracking the data very closely to monitor that risk. No doubt about that. So maybe you can tell me, in your view, what is the most critical pressure point right now? Is it trade policy where the U.S. is concerned?

Is it what's happening in Beijing as they try to balance doing a little bit more to stimulate domestic demand? Is it a story about the Fed and being a little hesitant to be accommodative given the risk not only to the inflation outlook, but maybe a period of stagflation here in the U.S.?

Yeah, certainly in the near term. I mean, all of those are big issues and definitely part of our ongoing conversations with investment managers across our business. But I think the big one is the bond market vigilantes waking up. They're saddling up, riding into town and really exerting a big influence on the situation, both in terms of the response to recent news around credit downgrades and the

and the fiscal measures being unveiled and talked about. But the consequences of a situation where the Fed is already in a cutting cycle and long-term bond yields are rising, that's quite a puzzling trajectory and pattern relative to what we normally see in history.

But if it sustains itself and we still see this pattern of fiscal risk premium coming into the long-term part of the U.S. Treasury curve, it has really big consequences for investment markets in the U.S. but right around the world. So, at some point, maybe a level around 5% long-term bond yields, the consequence and the pressure on equity markets get pretty severe in our view. In other words...

bond yields squeeze out the last drops of risk premium from the equity market and make that valuation arithmetic really difficult to justify at a point in time where the macro vibes, the vibes around the profits outlook, the

fuzzy and vague guidance that's being offered by S&P 500 corporates, you know, that really has a big effect. So, rising bond yields has a big effect in terms of the outlook for U.S. stock market. And then it also forces investors to reconsider where safe haven assets really are.

Maybe investors are better off positioning in the European bond curve or in the UK gilt curve or looking at emerging market bonds in India, for example, where yields are very high and there's some shelter from all of the tariff news. Or even looking at the corporate sector, where balance sheets are a lot better than the situation in the US government balance sheet. So I think it's these bond market vigilantes that's the key issue. But it

It's highly linked to the other policy themes, Fed themes, global geopolitical issues that you mentioned as well. So as I'm listening to you, Joe, I'm wondering whether the clients that you serve are inclined to reduce some of their exposure to U.S. assets right now, whether on the fixed income side or on the equity side. Is that a fair statement?

The end of exceptionalism. Yeah, exactly. Exactly like you say. I mean, I think most global investors looking at U.S. stocks are now...

reflecting on the point we reached at the end of 2024, beginning of 2025, where U.S. stocks were 70% of global market capitalization. That's something like a high watermark or a medium-term top, maybe, in terms of the relative share of U.S. stocks in global equities.

And I think where investors are still keeping U.S. exposure, they're doing it with a little bit less conviction around the dollar. So the exceptionalism story reflects on expectations around what the currency is going to do as well. So maybe for global investors, hedging, equity exposure makes sense.

or even else, rotating into Europe, rotating into China, where stock markets are more lowly valued with big, positive, visible catalysts for markets to continue to show good outperformance, especially if we can have a 12 to 18-month time horizon, because the short term is very hard to predict, as you know. And it's ditto for the Treasury market outlook. Many investors are asking me about Treasury market substitutes,

long-term treasuries, 10-year, 30-year treasuries with that bear steepening dynamic in place. Investors want to explore opportunities in European duration, opportunities in other parts of the India curve, or areas in alternative assets as well. Private credits comes up, hedge funds come up a lot.

And the reason is that you're looking for some sources of resilience in the portfolio in a world which is, you know, where markets are more volatile, not something that we've been so used to in recent years, where the policy uncertainty situation keeps that high level of volatility alive.

as a feature of investment markets, not a short-term bug, something that investors have to get used to. And so there's a real need and focus for having a more varied, many different color slices of pie in the pie chart of the portfolio to try and build good resilience in an unpredictable and volatile world. I'm going to ask you to make a prediction. That said...

To what extent are you confident that we are going to see a resolution to some of these trade issues before the end of the year?

Well, we've already seen some important progress, haven't we, with the process now around de-escalation and some trade deals being formed with the UK, for example. Most investors I speak to are expecting U.S. tariffs to continue to – some of the heat to continue to be taken out of that story. And maybe the average tariff rate settled down in the mid-teens.

Relative to what we've seen post the Liberation Day events, that's a positive outcome. But of course, it's still a big shock to the system, maybe six or seven times the tariff rate what we saw in the first Trump administration. So that still invokes a big stagflationary shock, at least in the near term, for investment markets and for economies to digest.

But maybe in a situation where there are some good market stories around valuations, around profits in other parts of global equity markets, particularly in China, particularly in Europe, there's something for investors to be positive about and look towards.

But it's clearly a difficult situation, high level of uncertainty. And as much as anything, in a more volatile environment, being agile and tactical and nimble in how we plot investment strategy is really, really key. Is there some counterintuitive intuition that you have right now that you would be willing to share? Something that you believe the market may be overlooking that you think will develop in a way that represents opportunity? Absolutely.

Yeah, I mean, there's lots because these sort of phases, there's an awful lot of focus on the very near term. And if investors can take a slightly longer term timeframe, the volatility and the uncertainty, I think, are throwing up a lot of opportunities, a

anomalous valuations for investors to look at different allocations in different parts of asset classes around the world. I mean, an interesting example is the movement that we've seen in Switzerland with bond yields going into negative territory. Is that something that is going to become a bigger feature of what we're seeing elsewhere in Europe?

maybe to reflect on the question about whether the European Central Bank should be more like Switzerland or maybe it should be more like the Fed. It's clearly more like Switzerland. So Europe is going to be very proactive in cutting rates. And unless there's an awful lot of bond issuance...

there's a big downward pressure on rates in Europe. So there are some very interesting positive fixed income stories. And there's a lot to focus on in the Asia region as well. India fixed income, China stock markets. I think a lot of these themes tend to be a little bit overlooked by global investors because the story around U.S. markets, U.S. exceptionalism, which has been that dominant meme over the last decade,

has sucked all of the interest and oxygen out of these other themes. As that breaks, as the fault lines appear in US exceptionalism, then it gives oxygen to some of these other stories. So big opportunity for rotation, a big opportunity to look at themes in Europe and Asia over the next 12 to 18 months. But extending a time horizon rather than just focusing on the very near term is probably the best advice at this juncture.

Great conversation, Joe. Thank you so much for joining us. He is Joe Little, the chief global strategist at HSBC Asset Management, joining from Hong Kong here on the Daybreak Asia podcast.

Thank you.

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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. So the U.S. equity market sold off today as those U.S. treasury yields jumped. The message from the bond market seemed to be get your fiscal house in order. We had the S&P closing down 1.6% today for its sharpest slide in a month. Joining me now is Rebecca Walzer. She is president at Walzer Wealth Management. She's on the line today from Phoenix, Arizona.

Can I begin by asking for your assessment on what we saw in today's market price action? Yeah. Well, you know, Doug, it's what we've been talking about really for the last six months. This global macroeconomic change that is really being spurred here by debt spend and growth of debt by central governments, you know, really for the last six

last, I'd say 15, 20 years, but since coronavirus in 2020, it has been exponential. So we started off expecting this week to be a little bit turbulent in the equity space because of the downgrade on Friday on Moody's to align with all of the other rating agencies. But we expected that that was going to create some turbulence.

But now what we're seeing is that global impact. If you look at the 20-year sale yesterday in Japan, that went really poorly. And that was a big tell for Japan. And now today, Wednesday, we see similarly. And obviously, 20 years is never the same as the 30 or the 10. But it's still a tell, right? And any time we start to see sluggishness and us selling our debt,

That has got to be a wake-up call. And so obviously the equity markets did not like that. We are looking at a global slowdown, and obviously the tariff policy is on top of that. We've been talking about this slowdown before Trump came in, before Trump started his hawking tariff. So this has been happening. Then he's got his policy on top of that.

And then when you see that, you know, the global demand, it's not this is not just a United States problem. This is that China is has issues and is collapsing from the property side. Japan has issues and is collapsing from their debt financing. Their debt financing is way beyond ours. As you know, they are the highest leveraged country in the world. So, you know, we have all of these things that are pointing us to just real systemic uncertainty.

underlying foundational issues that are not just going to get worked out around by micro quarterly expectations of Fortune 100 companies to do well. The yield on the 10-year just under 460 today, I think we've picked up, if you just look at the 10-year alone since the Fed pivot around 90 basis points, that's a monster size move. How much higher do you think the 10-year yield can go from here?

Well, I mean, I think that if we continue to see more, what's happening is things that are being priced in right now is just too much risk. I mean, if you look at that Moody's press release for our debt, they finally followed all the other rating agencies and gave us a downgrade. It's simply a matter of the inability to sustain our interest payments. We can't have our interest payments be 30% plus of our budget in the next 10 years or the next five years. And what

What happens when you have an administration like the Trump administration not saying pro or against, but his package is multi-trillions of dollars, just as Biden's budget was a $7.2 trillion budget. When you're collecting $5 trillion in taxes and your budgets are in the $7 trillion range, which you're debt financing $2 trillion, but you're not just debt financing $2 trillion, Doug. You're debt financing all of the interest on the 30, I'm going to round it up,

$38 trillion that we've already not collected in tax revenue that we've spent. And so, you know, we used to say this is our grandchildren's problem. And then we say it's our children's problem. This is actually our problem. The people that are alive today are going to be dealing with this problem in less than 10 years. This is a global macroeconomic catastrophe that is not going to be mathematically avoided at this point.

So if you see the risk of a yield on the 10-year pushing above, let's say we get to 475 on the 10-year, that would be another 15 basis points from here. It doesn't seem like a lot. Do you avoid the longer end of the curve right now if you had to put money to work in the bond market, stay on the short side?

Yeah, I think you have to. And let me tell you why. Because this is a self-fulfilling prophecy at a certain point. You have to understand that this is all interconnected. And even though the bond world really finances the world, we know that. We do also know that Wall Street is the one buying the bonds eventually. And if Wall Street isn't seeing that they can invest, they can't buy low and invest into their companies and make profits and sell, you know, make the differential, then they're not going to be doing that. And the fact

is, is that when you have yields that are that high and you have deficits that are this high, and you know you're going to be doing nothing but deficit financing for the foreseeable future. I mean, we have economists that have basically said we will never be able to pay our debt

It will never happen. And so we are globally entering kind of a debt spiral of just too much debt with too little income and too little revenue to sustain it. You can't have a 4 percent net deficit, trade deficit, when you're only growing your economy by 2.4 percent or 2.3 percent a year. You're literally losing GDP as you speak. You're literally contracting.

The entire economy. So President Trump seems to be intent on getting his giant tax bill pushed through. The Joint Committee on Taxation is estimating this bill would increase the deficit by $3.8 trillion over a decade. To your point, what does this mean for the equity market? And if you had to put money to work in stocks right now for clients, how would you go about doing that?

Well, it comes back down to what we've been talking about for six months, Doug. When we're getting to a point where there is a global macroeconomic problem with your currency, with the M2 money supply, with what is happening with liquidity. Because you remember, we've got all these commercial banks that now have unrealized equity losses since the tariffs went into place, and they have

all kinds of unrealized property losses that they haven't wanted to realize yet because the property valuations of our commercial lenders, obviously the commercials have gone down. So when you're looking at that, you have to think commodities. You have to think what are the safety assets for if we have some kind of collapse. You've got to have some kind of

allocation to safety. And that's real assets, hard asset classes, real estate, gold, silver, commodities, energy, utilities. Beyond that, because we have to have all of that to live. Beyond that, you have to then say, OK, on a certain portion of your portfolio, we want growth. So we're looking at AI, robotics, quantum computing. But you can't

look at that if you have to have immediate returns because this is in the monetization phase and has not yet monetized. It's going to take a while to monetize. So we want to mix, but I will tell you these global changes that are happening right now are definitely make us be more macro resistant and a little bit more cautious and a little bit more going towards the things that we know are going to perform

If we do have, I mean, just Japan yesterday and then the United States today, both on their 20-year auctions, this looks really bad, Doug. And this is on the heels of another credit downgrade that we've had in our country. So I just think that Trump has got a really hard time dealing with all of this and still trying to pass a multi-trillion dollar budget and package. And we can't have the salt limit.

at 40,000, which is what is being held up now by the Republicans. How can you authorize 40,000 as a salt limit when 10,000 was scored to give us, you know, multi-trillions of dollars of deficit? We just don't have the money and we're starting to see that the rest of the world isn't going to buy it for us, isn't going to provide it for us. So,

So you seem to be saying that it's not just a U.S. issue when it comes to the risks of equity markets. It's global. I'm getting that clearly, right? Absolutely. But it's something that I think we have to look at in terms of sell America. Is that still a predominant theme that maybe you want to look at markets like Europe? Maybe there are selective markets in Asia, that the theme of sell America is still something that you want to kind of stay true to?

If you look at the institutionals, the hedge funds, everything, they were still very pro-Europe and anti-American. We're still net selling out in April. So I think that there are still a lot of groups that are like that. Will you be able to find a country that does and outperforms America in 2025? Yes. But will that country have the economic security that we need?

we have here in the United States as the world's reserve currency? No. But is our security as the world reserve currency what it's always been? And can we just relax on that and go to bed at night and not have any cares? That's a no now, too. So everything is changing almost all together at the same time, Doug. And this is what you get when you start to approach a debt spiral. This is exactly the beginning stages of a debt spiral. The interest becomes too much of a portion of your budget, and therefore you cannot

keep expanding and expanding and expanding your spending. It just has to end at some point. So, Rebecca, in your model portfolio right now, talk to me about the level of cash or cash equivalents as high as 30 percent at the moment.

Well, we do like to go. We don't like to have a lot of auto cash for too long. So we will go to, you know, strong, hard asset before we stick 30 percent in cash. But I would like to see an allocation of cash anywhere from 10 to 15 right now, because this is just a very rapidly changing environment. And you can see that, you know, we've had five consecutive months of University of Michigan coming in with negative sentiment. And the consumers aren't

you know, thinking that they're going to go out and buy once the tariffs hit. We only have a 90 day pause on tariffs. So I would say right now we're at 10 and 15, between 10 and 15 percent. And the difference between that and 30 would be what we'd allocate to hard assets. It's always a pleasure to talk with you. Thank you, Rebecca. Rebecca Walzer there, president of Walzer Wealth Management here on the Daybreak Asia podcast.

Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the stories shaping markets, finance, and geopolitics in the Asia Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Krisner, and this is Bloomberg.

Thrivent can help you plan your finances for the people, causes, and community you love. What makes Thrivent different? Financial services and generosity programs are combined to help you build a financial roadmap for the future, while also creating opportunities to give back along the way. Visit Thrivent.com to learn more.

Thrivent, where money means more.

Ready to bring your visions to life? Learn how at AmazonBusiness.com. This is an iHeart Podcast.