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The Star
4 days ago
- Business
- The Star
Dollar floored as investors seek that extra hedge
ALL three major US asset classes – stocks, bonds and the currency – have had a turbulent 2025 thus far, but only one has failed to weather the storm: the dollar. Hedging may be a major reason why Wall Street's three main indices and the ICE BofA US Treasury index are all slightly higher for the year to date, despite the post-'Liberation Day' volatility, while the dollar has steadily ground lower, losing around 10% of its value against a basket of major currencies and breaking long-standing correlations along the way. The dollar was perhaps primed for a fall. It's easy to forget, but only a few months ago the 'US exceptionalism' narrative was alive and well, and the dollar scaling heights rarely seen in the past two decades. But that narrative has evaporated, as US President Donald Trump's controversial economic policies and isolationist posture on the global stage have made investors reconsider their exposure to US assets. But why is the dollar feeling the burn more than stocks or bonds? Pension fund-amentals Non-US investors often protect themselves against sharp currency fluctuations via the forward, futures or options markets. The difference now is that the risk premium being built into US assets is pushing them – especially equity holders – to hedge their dollar exposure more than they have in the past. Foreign investors have long hedged their bond exposure, with dollar hedge ratios traditionally around 70% to 100%, according to Morgan Stanley, as currency moves can easily wipe out modest bond returns. But non-US equity investors have been much more loath to pay for protection, with dollar hedge ratios averaging between 10% and 30%. This is partly because the dollar was traditionally seen as a 'natural' hedge against stock market exposure, as it would typically rise in 'risk off' periods when stocks fell. The dollar would also normally appreciate when the United States economy and markets were thriving – the so-called 'Dollar Smile' – giving an additional boost to US equity returns in good times. A good barometer of global 'real money' investors' view on the dollar is how willing foreign pension and insurance funds are to hedge their dollar-denominated assets. Recent data on Danish funds' currency hedging is revealing. Danish funds' US asset hedge ratio surged to around 75% from around 65% between February and April. According to Deutsche Bank analysts, that 10 percentage point rise is the largest two-month increase in over a decade. Anecdotal evidence suggests similar shifts are taking place across Scandinavia, the eurozone and Canada, regions where dollar exposure is also high. The US$266bil Ontario Teachers' Pension Plan reported a US$6.9bil foreign currency gain last year, mainly due to the stronger dollar. Unless the fund has increased its hedging ratio this year, it will be sitting on huge foreign currency losses. 'Investors had embraced US exceptionalism and were overweight US assets. But now, investors are increasing their hedging,' says Sophia Drossos, economist and strategist at the hedge fund Point72. And there is a lot of dollar exposure to hedge. At the end of March foreign investors held US$33 trillion of US securities, with US$18.4 trillion in equities and US$14.6 trillion in debt instruments. Riding out the storm The dollar's malaise has upended its traditional relationships with stocks and bonds. Its generally negative correlation with stocks has reversed, as has the usually positive correlation with bonds. The divergence with Treasuries has gained more attention, with the dollar diving as yields have risen. But as Deutsche Bank's George Saravelos notes, the correlation breakdown with stocks is 'very unusual'. When Wall Street has fallen this year the dollar has fallen too, but at a much faster pace. And when Wall Street has risen the dollar has also bounced, but only slightly. This has led to the strongest positive correlation between the dollar and S&P 500 in years, though that's a bit deceptive, as the dollar is sharply down on the year while stocks are mildly stronger. Of course, what we could be seeing is simply a rebalancing. Saravelos estimates that global fixed income and equity managers' dollar exposure was at near record-high levels in the run-up to the recent trade war. This was a 'cyclical' phenomenon over the last couple of years rather than a deep-rooted structural one based on fundamentals, meaning it could be reversed relatively quickly. But, regardless, the dollar's hedging headwind seems likely to persist. 'Given the size of foreign holdings of both stocks and bonds, even a modest uptick in hedge ratios could prove a considerable foreign exchange flow,' Morgan Stanley's foreign exchange strategy team wrote last month. 'As long as uncertainty and volatility persist, we think that hedge ratios are likely to rise as investors ride out the storm.' — Reuters Jamie McGeever is a columnist for Reuters. The views expressed here are the writer's own.
Wall Street Journal
6 days ago
- Business
- Wall Street Journal
How to Invest When Everything Yields the Same
Here's an investment puzzle: Treasurys, stocks, cash and corporate bonds all yield about the same. Either risky assets are less rewarding than usual or safe assets are less safe than usual. Or, perhaps, both. The gap between the highest and lowest yields among the main U.S. assets is the smallest in 40 years, having dropped after the election in November and stayed low. This uses the earnings yield for stocks, the earnings divided by price, or the inverse of the PE ratio, along with the yields on the three-month Treasury bill, as a proxy for cash, the 10-year and 30-year Treasurys and the ICE BofA U.S. corporate bond index.
Axios
16-04-2025
- Business
- Axios
What the bond market is saying
The bond market — just like the stock market — is sending signs that maybe you can start breathing again. Not breathing normally, perhaps, but still, breathing. Why it matters: The junk bond market seized up after the "Liberation Day" tariff announcements on April 2, but now it's showing signs of life. The big picture: The bond market is more important for the economy than the stock market, since it's the main way for real money to find its way into companies and deals. (The stock market, by contrast, is overwhelmingly dominated by investors just selling shares to other investors.) Where it stands: After April 2, no companies rated below investment grade — high yield, or junk, issuers — were able to issue debt at all, until Tuesday, when a single natural gas company came to market. A closely watched index of high-yield spreads, from ICE BofA, spiked alarmingly from 3.42 percentage points on April 2, before Trump's reciprocal tariffs were announced, to 4.61 points on April 7. That is on top of the rise in rates over the same period. The underlying interest rate, plus the spread, is the total yield on the bond. Since then, spreads have come back in, to about 4.14 points on Tuesday, in a sign that outflows from the market have ceased and opportunistic funds have started buying. "It's not a disaster for high yield," says Bill Zox, a high-yield bond portfolio manager at Brandywine. "We had a very bad week of outflows. But things do seem to have settled down." Zoom out: When the market expects a recession, it tends to trade at a spread of about 6 points, Zox says, compared to about 2.5 points when it doesn't. So the pullback in recent days means we've moved from being about halfway to recession levels to being about a third of the way to recession levels. The other side: Liquidity remains scarce, Zox says, with bid/offer spreads at historically wide levels. That means a lot of investors are happy to wait for attractive opportunities in the future instead of putting money to use today.
Reuters
10-04-2025
- Business
- Reuters
Explainer: What just happened in the U.S. Treasury market?
LONDON, April 10 (Reuters) - U.S. President Donald Trump's decision to pause the hefty duties he had said he would impose on dozens of countries one week ago followed turmoil in financial markets that included an acute selloff in the $29 trillion Treasury market. Trump said on Wednesday the bond market had recovered well after investors became queasy about it in reaction to his tariff announcements. The selloff is the latest sign of the power of government bond markets to act as a restraint on policymakers, while talk of a return of so-called bond vigilantes has risen in recent years. WHAT HAPPENED IN BOND MARKETS THIS WEEK? In short, the U.S. Treasury market -- a central pillar of the global financial system -- came under heavy selling pressure, sending 10-year borrowing costs surging. At one-point, 10-year bond yields were set for their biggest weekly jump in more than a decade. Bond yields move inversely to the price. Trading at 4.27% on Thursday, those yields are comfortably below Wednesday's peak of 4.51% . They are also well below the high of almost 5% hit in late 2023 and the double-digit levels seen in the 1980s. Notably, this jump was a sharp reversal of the initial fall seen after Trump's sweeping tariff announcement last week that raised U.S. recession risks and expectations for rate cuts. WHY DO WE CARE? Because the Treasury market is crucial to financial market stability at home and abroad. A government can raise revenue to fund spending through income such as tax receipts or borrow money on the bond markets. Not only does it face higher borrowing costs it there's a bond selloff but those increases filter across to mortgages and corporate loans, spreading out the economic damage. The 30-year mortgage rate for instance is benchmarked to 10-year Treasuries , which surged by more than 20 bps at one point on Wednesday - before the tariff pause brought calm. Yields on U.S. corporate bonds, which are priced off of U.S. Treasuries, have shot up. Yields on U.S. junk bonds closed Wednesday nearly a percentage point higher than a week ago at 8.38%, an ICE BofA index shows (.MERH0A0), opens new tab Higher Treasury yields also pushed up borrowing costs across the globe, a headache for countries such as Britain or France that are already grappling with high amounts of debt. Heavily indebted Japan's 30-year bond yield this week surged to 21-year highs, and Britain's 30-year bond yields hit their highest since 1998. Both were below those peaks on Thursday , . HOW BAD WAS THE STRESS? The speed and the scale of the selloff in Treasuries meant signs of dislocation emerged as hedge funds unwound some debt-fuelled bets. While market participants, who include brokers, traders and investors, said the selloff was orderly, indicators such as bid-ask spreads -- or the difference between buyers' and sellers' price offers -- widened on Wednesday before Trump's announcement. One trading desk said the bid-ask spread was double its normal levels. Investors and analysts likened this week's moves to the frantic "dash-for-cash" of March 2020, when a crash in the Treasury market forced the Federal Reserve to step in with a massive $1.6 trillion bond-buying rescue. The scale of the selloff, highlighting vulnerabilities in a key market, also drew parallels with Britain's 2022 mini-budget crisis that sparked a UK bond rout. DID HEDGE FUNDS CAUSE THE SELLING? One explanation for the sharp selloff was that a rapid unwinding of so-called basis trades was exacerbating the selling. Basis trades, typically the domain of macro hedge funds, rely on selling futures contracts or paying swaps and buying cash Treasuries with borrowed money, with a view to exploiting slight price differences. If a prime brokerage, which lends money to hedge funds, asks for their money back that can lead to an unwinding of the basis trade. There was also some concern that China could offload U.S. Treasuries, something that would take time to show up in official numbers. China is the second-biggest foreign holder of U.S. government debt after Japan, holding almost $761 billion of bonds in January. WHERE DO THE BOND VIGILANTES COME INTO IT? The term bond vigilantes, coined in the 1980s, refers to debt investors who seek to impose fiscal discipline on governments they perceive as profligate by raising their borrowing costs. In the context of this week, the term is also being used to describe the bond market selloff as a sign of investors expressing concern about the consequences of erratic policymaking. "The Bond Vigilantes have struck again," Yardeni Research said in a note, adding that they were the only players with a 100% success rate in U.S. markets. "As far as we can tell, at least with respect to U.S. financial markets, they are the only 1.000 hitters in history."
Yahoo
10-04-2025
- Business
- Yahoo
Explainer-What just happened in the U.S. Treasury market?
LONDON (Reuters) - U.S. President Donald Trump's decision to pause the hefty duties he had said he would impose on dozens of countries one week ago followed turmoil in financial markets that included an acute selloff in the $29 trillion Treasury market. Trump said on Wednesday the bond market had recovered well after investors became queasy about it in reaction to his tariff announcements. "The bond market now is beautiful," he told reporters. The selloff is the latest sign of the power of government bond markets to act as a restraint on policymakers, while talk of a return of so-called bond vigilantes has risen in recent years. WHAT HAPPENED IN BOND MARKETS THIS WEEK? In short, the U.S. Treasury market -- a central pillar of the global financial system -- came under heavy selling pressure, sending 10-year borrowing costs surging. At one-point, 10-year bond yields were set for their biggest weekly jump in more than a decade. Bond yields move inversely to the price. Trading at 4.27% on Thursday, those yields are comfortably below Wednesday's peak of 4.51%. They are also well below the high of almost 5% hit in late 2023 and the double-digit levels seen in the 1980s. Notably, this jump was a sharp reversal of the initial fall seen after Trump's sweeping tariff announcement last week that raised U.S. recession risks and expectations for rate cuts. WHY DO WE CARE? Because the Treasury market is crucial to financial market stability at home and abroad. A government can raise revenue to fund spending through income such as tax receipts or borrow money on the bond markets. Not only does it face higher borrowing costs it there's a bond selloff but those increases filter across to mortgages and corporate loans, spreading out the economic damage. The 30-year mortgage rate for instance is benchmarked to 10-year Treasuries, which surged by more than 20 bps at one point on Wednesday - before the tariff pause brought calm. Yields on U.S. corporate bonds, which are priced off of U.S. Treasuries, have shot up. Yields on U.S. junk bonds closed Wednesday nearly a percentage point higher than a week ago at 8.38%, an ICE BofA index shows Higher Treasury yields also pushed up borrowing costs across the globe, a headache for countries such as Britain or France that are already grappling with high amounts of debt. Heavily indebted Japan's 30-year bond yield this week surged to 21-year highs, and Britain's 30-year bond yields hit their highest since 1998. Both were below those peaks on Thursday. HOW BAD WAS THE STRESS? The speed and the scale of the selloff in Treasuries meant signs of dislocation emerged as hedge funds unwound some debt-fuelled bets. While market participants, who include brokers, traders and investors, said the selloff was orderly, indicators such as bid-ask spreads -- or the difference between buyers' and sellers' price offers -- widened on Wednesday before Trump's announcement. One trading desk said the bid-ask spread was double its normal levels. Investors and analysts likened this week's moves to the frantic "dash-for-cash" of March 2020, when a crash in the Treasury market forced the Federal Reserve to step in with a massive $1.6 trillion bond-buying rescue. The scale of the selloff, highlighting vulnerabilities in a key market, also drew parallels with Britain's 2022 mini-budget crisis that sparked a UK bond rout. DID HEDGE FUNDS CAUSE THE SELLING? One explanation for the sharp selloff was that a rapid unwinding of so-called basis trades was exacerbating the selling. Basis trades, typically the domain of macro hedge funds, rely on selling futures contracts or paying swaps and buying cash Treasuries with borrowed money, with a view to exploiting slight price differences. If a prime brokerage, which lends money to hedge funds, asks for their money back that can lead to an unwinding of the basis trade. There was also some concern that China could offload U.S. Treasuries, something that would take time to show up in official numbers. China is the second-biggest foreign holder of U.S. government debt after Japan, holding almost $761 billion of bonds in January. WHERE DO THE BOND VIGILANTES COME INTO IT? The term bond vigilantes, coined in the 1980s, refers to debt investors who seek to impose fiscal discipline on governments they perceive as profligate by raising their borrowing costs. In the context of this week, the term is also being used to describe the bond market selloff as a sign of investors expressing concern about the consequences of erratic policymaking. "The Bond Vigilantes have struck again," Yardeni Research said in a note, adding that they were the only players with a 100% success rate in U.S. markets. "As far as we can tell, at least with respect to U.S. financial markets, they are the only 1.000 hitters in history." Sign in to access your portfolio
