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The US is learning a lesson in market maleficence as post-‘Liberation Day’ shockwaves continue to ripple through global markets. Today’s pain point is US Treasuries, and if they go, nothing’s safe. Not even Games Workshop.
So, is the surge in UST yields and dollar dip the arrival of America’s very own “moron risk premium” — the double discount on bonds and currencies that Britain incurred following Liz Truss’s infamous mini-budget?
No, says the guy who coined the term.
In a note just published, TS Lombard’s Dario Perkins says the US is “a long way from a Liz Truss moment”, pointing to the relatively smaller move in yields since The Event:
Sure, the vibes aren’t great, says Perkins:
For the first time in my career, I’m hearing widespread skepticism about the competency of US policymakers. This isn’t about politics. A lot of investors would welcome, for example, Scott Bessent’s vision for Rubinomics 2.0. And it isnt about “policy mistakes”. The Fed’s history is littered with straightforward errors. It is about recklessness. That is why many global investors are also making the comparison with the UK’s “Liz Truss moment”.
However, it’s the style and pace that really matters. Markets can often cope with things breaking slowly, but it’s a fast break that usually has knock-on effects, as the UK’s LDI crisis in 2022 showed. Here’s Perkins:
The scariest dynamic during the UK crisis was that bonds and sterling were selling off at the same time. That signaled a sudden loss of confidence among global investors. (Confirmed by my conversations with them at the time, and questions like “what the heck is going on in the UK?!”) Yields rose and the currency plunged. That was the dynamic at the heart of my MRP.
Encouragingly this is not the dynamic we are seeing in the US. We did get a brief taste of it, but — so far — there is still global confidence in the dollar. Watch the situation closely, especially given the tone among international investors. Attacks on the Fed, talk of Mar-a-largo accords, threats to foreign UST holders, massive (arbitrary) tariffs . . . these are things that could trigger a nastier mkt dynamic. And that would be the path to a blowout in the term premium and a proper dollar crash.
So, less moronic than Liz Truss at least. Reassuring.
Of course, one advantage the UK had was that, once the going got rough, the Bank of England could simply step in and depose Truss Truss was more or less obliged by pressure from her own MPs to keelhaul both Kwasi Kwarteng and then herself in order to restore (some) market confidence.
GLWT, America.
