Triple sell-off in bonds, stocks, and gold—where did the capital flow? Why is it said that Wosh has already helped Trump before even taking office?
┈➤ Short-term U.S. Treasuries
Only short-term U.S. Treasuries are rising (yields falling).
The yield on 6-month Treasuries remains largely flat, but yields on Treasuries with maturities under 6 months have declined, indicating capital is flowing into short-term U.S. Treasuries.
The market anticipates future rate hikes and inflation, but expects a slightly lower probability of rate hikes within the next six months and relatively moderate inflation.
As a result, some capital has flowed into short-term U.S. Treasuries, with strong demand for 1-, 2-, 3-, and 4-month Treasuries—leading to price increases and lower yields.
┈➤ U.S. Dollar
Another portion of capital has flowed into the U.S. dollar, as the market views holding cash as more reliable in the short term.
The U.S. Dollar Index rose overall in May, climbing from around 97 to 99.41, surpassing April’s high.
┈➤ Benefit to the U.S. Treasury
U.S. Treasury yields have risen, particularly long-term yields, which have increased more significantly. This is related not only to inflation and rate hike expectations and rapid expansion of U.S. debt, but also to Wosh’s impending appointment.
Previously, Wosh publicly stated that balance sheet reduction should precede rate cuts.
Balance sheet reduction would likely push up long-term Treasury yields.
Yet under this dynamic, capital flows into short-term Treasuries, causing their yields to fall.
Everyone knows the U.S. Treasury is the master of “borrowing to repay debt.” Increased demand for short-term Treasuries and lower yields allow the Treasury to issue more 4-week, 6-week, 13-week, and 17-week bills at lower financing costs to pay off maturing debt.
Thus, even before taking office, Wosh has already helped Trump. Whether the dual sell-off in stocks and bonds that drove capital into short-term Treasuries was intentional or coincidental remains unknown.
As for whether Wosh will reduce the balance sheet after taking office?
Brother Bee believes there is a reasonable chance he will, as reducing the balance sheet may be politically correct in the face of inflation.
But discussing toxicity without mentioning dosage is sheer nonsense.
The scale of balance sheet reduction is likely to be very small; otherwise, it would further push up long-term Treasury yields.
Some readers ask: Why can’t the Fed simply buy more long-term Treasuries and fewer short-term ones?
The Fed can adjust the maturity structure of its bond purchases by increasing purchases of long-term Treasuries to suppress rising long-term yields—but this increase should not be excessive, as an overly high proportion of long-term holdings would reduce the Fed’s flexibility in QE/QT operations.
Regardless, even if Wosh does reduce the balance sheet, it will likely be only a marginal reduction—minimizing impact on Trump and having relatively smaller negative effects on speculative markets, including U.S. stocks and cryptocurrencies.
