Bond, stock, and crypto triple sell-off—where did the capital go? Why is it said that Walsh 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 six 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 increases within the next six months and relatively moderate inflation.
As a result, some capital has shifted into short-term Treasuries—4-week, 8-week, 13-week, and 17-week bills are in high demand, driving prices up and yields down.
┈➤ The U.S. Dollar
Another portion of capital has flowed into the U.S. dollar, as markets perceive 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—already surpassing April’s peak.
┈➤ Benefit to the U.S. Treasury
U.S. Treasury yields have risen, particularly long-term yields, which have increased more sharply. This is linked not only to inflation and rate hike expectations and rapid Treasury expansion, but also to Walsh’s impending appointment.
Previously, Walsh 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 has flowed into short-term Treasuries, causing their yields to fall.
Everyone knows the U.S. Treasury is the master of “borrowing to repay.” With rising demand for short-term Treasuries and declining yields, the Treasury can issue more 4-week, 6-week, 13-week, and 17-week bills to finance maturing debt at lower costs.
Thus, even before taking office, Walsh has already helped Trump. Whether the bond and stock sell-off driving capital into short-term Treasuries was intentional or coincidental remains unclear.
Will Walsh implement balance sheet reduction after assuming office?
I believe there is a reasonable chance he will—given inflation pressures, balance sheet reduction may be politically expedient.
But discussing toxicity without mentioning dosage is sheer nonsense.
The scale of reduction is likely to be minimal; otherwise, long-term Treasury yields would rise further.
Some ask: Why can’t the Fed simply buy more long-term Treasuries and fewer short-term ones?
The Fed can adjust its portfolio composition by increasing purchases of long-term Treasuries to suppress rising long-term yields—but this increase must be modest. Excessive long-term holdings would reduce the Fed’s flexibility in implementing QE or QT.
Regardless, even if Walsh does reduce the balance sheet, it will likely be only a minor reduction—minimizing impact on Trump and limiting negative effects on speculative markets, including U.S. equities and cryptocurrencies.
