Dear Valued Clients and Friends,
What a difference a week makes! Last Friday, the market dropped over 700 points, and the 10-year hit 4.8%. Someone could have had a bad cold for a few days and thought they woke up in a different year, as one week later, the 10-year rallied like crazy, with the yield down to 4.59% and the market up almost 1,700 points.
It is all sort of stupid, but it is what it is. The panic is stupid. The euphoria is stupid. And certainly, most of the attempts to analyze it that I come across are stupid. But what isn’t stupid is that human beings are human, and so every now and then need to be reminded of how stupid human beings can be.
Of course, I am grateful that humans are human. I am also grateful that humans need to be reminded of what that means at times because it has given me a great purpose in life.
Today’s Dividend Cafe will revisit some of these things but mostly dive into our expectations for incoming Secretary of Treasury Scott Bessent. Let’s jump into the Dividend Cafe!
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Be a 10
The 10-year treasury bond yield is the story of markets right now. The correlation between stocks and bonds has come back with a vengeance, and the tension between valuation and economic strength is the story of risk assets for 2025, all embodied in the bond yield. I have rarely been so excited to have timestamped my annual white paper.
Just Sayin’
Two biggest weeks for the bond market in over a year:
Week of 11/21, when it was announced Scott Bessent was Trump’s choice for Treasury Secretary
Week of 1/13, when Scott Bessent testified before the Senate Finance Committee for confirmation to the Treasury Secretary position
Mister Secretary
The incoming Secretary of Treasury, Scott Bessent, testified in front of the Senate Finance Committee for a confirmation hearing this week and provided more color on his own agenda and the manner in which his work will interact with President Trump’s agenda than we have heard thus far. The major takeaways I would highlight:
- China is going to be the focus with tariff talk, with “other policy goals” as the primary focus with other countries.
- He did reiterate that he sees tariffs as useful in addressing “trade imbalances”
- The administration seems focused on the fact that China did not live up to its end of the 2020 deal with agriculture purchase commitments and that China’s economy is not well (indeed, hours after Bessent’s testimony, China released its GDP reporting data which revealed 5% growth, but a truly weakening domestic state meaning its reliance on exports has grown, not mitigated). This pressure point seems to me to be at the center of the Trump 2.0 strategy
- My 2025 white paper and much of our research and focus has been on the currency dynamic with China, and the fact that the incoming Treasury Secretary (a global macro and forex maven in his own right) is very focused on the possible of using a currency accord to achieve policy objectives. What I did not expect was for Bessent to actually quantify it, offering data to suggest that for every 10% increase in tariffs, the currency adjusts 4%. Now, the tricky part here is that the Yuan has already dropped 4% relative to the dollar since the election, so some would argue this pricing has already begun.
- There were no major areas where I would say the incoming Secretary put himself at odds with the President-elect who nominated him, but it was interesting to hear him defend some elements of the debt ceiling (Trump has recently been outspoken in asking for its total suspension). Bessent is at his strongest in addressing market impact of given policy decisions, and his use of the term “fragile equilibrium” to describe the American bond market was poetry to me.
- He was a force to be reckoned with on deficits and demonstrating that revenues are at all-time record highs (never have we collected more tax revenue), yet deficits are sky high as expenses are 4% above the long-term average relative to the norm. His framing of this issue is entirely around spending as a percentage of GDP, and this speaks to not only an economically cogent grasp of the issue but reveals a philosophical framework that sees the private economy as the source of productivity.
- The tax cut priorities we heard from Bessent were the same I have reiterated will be the priority from Trump 2.0 – no tax on tips, and a lower corporate rate for domestic manufacturers. What Bessent did that I have not seen laid out before is explain the latter in the context of offsetting impact of tariffs.
- I thought he showed political deftness in what he did not address (expanded Medicaid subsidies set to expire in a year, what spending cuts he would like to see, etc.). For those who still believe in the separation of powers, it is not the Treasury Secretary’s job (or any part of the executive branch) to pass legislation. It is the job of Congress to pick what to spend money on and what not to spend money on. The Treasury Department does (and should) have an opinion on how to allocate resources, how to structure the debt that pays for it, and what ratios they want to see in the economy – but the composition of the debt is Congress’s job and for Congress to ask Treasury what they want to see in this regard is a confused understanding of Constitutional functionality.
All in all, I would not say there were any surprises, and I did feel soon-to-be Secretary Bessent carried himself well. He is in a tough position politically around tariffs and the need to show deference to his soon-to-be boss, yet I also believe he was hardly vague about the fact that tariffs are intended to be negotiating tactics and tools for policy goals, not meritorious in and of themselves. Referring to them as sources of revenue for the Treasury bothers me a bit, but I do understand why he has to say it. Fundamentally, I would be more focused on his deft use of currency exchange to move the needle here, more than the role he will play in tariff policy.
Buyers of First Resort
As I type, one can lend their money to the United States Treasury Department for two years and receive 4.29% in interest per year, and they can lend to the U.S. for ten years and receive 4.67% per year. Those “yields” move up and down every day, meaning that the prices paid for 2-year or 10-year maturity bonds change, and in so changing, the math that tells us the yield changes. These yields on two-year and ten-year debt have been much lower, much higher, and everywhere in between throughout history.
But, the other thing that changes over time is not just the yields offered for different treasuries, but who the primary buyers are at different points in time. On one hand, you could say that the buyer base responds to the yield reality at different stages of the cycle, and on the other hand, you could see that the buyer base helps create the yield environment. A buyer base heavily driven by those wanting to create an effect on their own currency (i.e., sovereign wealth funds of other countries) may want a weaker dollar, so they become big buyers, hoping to push yields down. A buyer base heavily driven by a desire to hold interest rates lower (i.e. a central bank trying to effect a monetary policy objective) may do the same (become a big buyer), but for a different reason than a sovereign wealth fund.
Central banks and foreign buyers tend to be interventionist, proactive buyers – whereas another category of buyers – savers and investors – tend to be reactionary and opportunistic. Savers may flock to Treasuries when they get scared of a world event, bidding prices up and pushing yields lower. They also may see interest rates rise (as they have the last few years), and allocate more capital there based on the improved opportunity (i.e. retirees taking income, insurance companies trying to get better interest income for future payouts, etc.).
We have seen a large increase in foreign buyers of Treasuries over the last 2-3 years, yet it is primarily private foreign buyers. This suggests it is less sovereign forex policy-driven and more of a yield and currency play from private savers and investors in foreign countries. Japan owns $1.1 trillion of U.S. debt, and China owns $760 billion. There was a time when people wrung their hands over what we would do about foreign countries owning so much of our debt (I never understood how that gave them leverage over us versus us having leverage over them). But regardless, $1.8 trillion out of $29 trillion of public debt, is not that much. From the Fed to Japan to China to a pension fund in Norway to an insurance company in Kansas to the bank down the street to Mr. & Mrs. Smith, there are a lot of options for Treasury bond purchasers, and those appetites change and fluctuate over time. It’s what makes a market.
Chart of the Week
The underlying value of the real estate and retirement accounts and so forth that undergird one side of the ratio may very well be vulnerable, but any discussion of debt levels, systemically, from mortgages to credit cards to student loans, has to be understood as a numerator versus a denominator. And here is a stat that the pessimistic cult of charlatans will be furious at me for sharing.
Quote of the Week
“Always tell the truth. That way, you don’t have to remember what you said.”
~ Mark Twain
* * *
There will not be a Dividend Cafe on Monday, with the markets and banks closed for MLK Day. Next Tuesday and Wednesday, all 75 of the great people of The Bahnsen Group come into Newport Beach for our team’s annual off-site. The meetings are intense, challenging, productive, and rewarding, and the time together is simply fantastic. We did these annual get-togethers with less than ten people at one point in time, and so now to have 75 people from nine offices come together is all at once very special and a lot more complicated. But there is one thing that has not changed a whiff and never will. Every person there is committed to a client-first culture, an obsession with being extraordinary, and a sincere care for one another. To these ends, we work and will work next week.
Enjoy the long weekend!
With regards,
David L. Bahnsen
Chief Investment Officer, Managing Partner
The Bahnsen Group
thebahnsengroup.com
This week’s Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet
