JD Straight Up - 26May25 - Bonds Away

Bonds Away

Drulard Family Capital Fund

Fortnightly Macro View

JD Straight Up:

S&P 500 at 5889 – up 2% from 5794 two weeks ago

VIX at 19 – flat from 19 two weeks ago

10yr Treasury yielding 4.43% (flat from 4.44% two weeks ago)

Agg (US Aggregate Bond Index) at 97.50 – flat from 97.55 two weeks ago

Gold at 3262 per oz (up 1% from 3241 two weeks ago)

Crude Oil (WTI) at 63 per barrel (flat from 63 two weeks ago)

Bitcoin at 108k (up 5% from 103k two weeks ago)

JPM shares at 264 (up 2% from 259 two weeks ago)

Deutsche Bank shares at 27.51 (up 1% from 27.23 two weeks ago)

Truist shares at 39.82 (down 3% from 41.00 two weeks ago)

Blackstone shares at 138.41 (down 6% from 147.55 two weeks ago)

Magnificent 7 Index at 331 (up 5% from 315 two weeks ago)

US unemployment: at 227,000 in latest claims – flat from 228,000 two weeks ago

EUR at 1.13 USD (up 1% from 1.11 two weeks ago)

GBP at 1.34 USD (up 2% from 1.32 two weeks ago)

Macro Environment

Inflation continues above target with US at 2.3% and EU at 2.4%.  Tariff negotiations between US and its major trading partners continue to evolve erratically.  War persists in Ukraine and Gaza and beyond with no sign of abatement.  US deficit continues to grow as the US House passes a new bill to increase spending, extend tax cuts, and expand the national debt.  US bonds trade down, driving yields up.  Oil trades at 62.

Macro View

The grand plan promoted by the US Treasury secretary was to reduce the deficit from 6% to 3% through spending cuts (think DOGE), tax cuts (to spur investment and growth), and a reset of global trade and monetary policy (think tariffs).  New revenue derived from growth and tariffs would more than offset the cost of tax cuts or extensions to prior cuts and confidence in the plan would help drive a rally in treasuries that would push yields down and allow for cheap government financing and terming out of government debt to reduce the current interest burden.  This would all gather momentum and produce a flywheel effect as it worked its way through the economy and evidence of its success was manifest.

Relevance

The current problem is that only the administration seems to believe in the grand plan and its associated big beautiful bill.  The last rating agency (Moodys) with a triple-A rating on the US notched down and the mythical 'bond vigilantes' took control.  The media loves to create a superhuman villain (or hero depending on your perspective) and anthropomorphize what is merely risk-adjusted money flow coming from programmatic asset allocation.  There is likely no secret club of billionaire bond traders co-ordinating from their lairs in tax-advantaged islands to drive bond yields higher.  Instead, there is a natural push when it appears that there is no commitment or intention or plan that is likely to reduce the deficit and address the compounding US debt.  Hence, models assess a higher risk to the liquidity and solvency of the US and demand a higher yield to compensate for it.  It is just simple finance encapsulated in even the simplest models.

Head Scratchers

1 - Can a stablecoin apparatus be set up to buy billions if not trillions of treasury issuance and thereby drive rates lower and hold them there?

2 - Are bitcoin ETFs what is driving the record prices of bitcoin and if so is this all retail money and people converting 401k and other typically more conservative vehicles into bitcoin value chasers?

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#17- 26May25