The Dividend Cafe - Wednesday - May 28, 2025

Episode Date: May 28, 2025

Market Insights and Sovereign Debt Discussion - Dividend Cafe In this episode of Dividend Cafe, Brian Szytel discusses the recent market movements following a significant rise due to a delay in tariffs on the EU. He covers the Richmond Fed survey results, FOMC meeting minutes, and the implications of long-term sovereign debt yields, particularly from Japan. Brian also breaks down the ownership of US Treasury debt and the impact of foreign investments. Looking ahead, he previews upcoming economic data releases, including Q1 GDP, jobless claims, pending home sales, and PCE data. Listeners are briefed on the market's current status and forthcoming economic indicators. 00:00 Introduction and Market Recap 00:35 Economic Calendar and Market Sentiment 00:51 Impact of Trade Announcements 01:55 Sovereign Debt and Treasury Holdings 03:46 Japan's Debt and Yield Curve Control 05:43 Upcoming Economic Data and Conclusion Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Welcome to Dividend Cafe. This Wednesday, May the 28th, Brian Seitel with you here on some follow through here in trading. After a real big move up yesterday here in markets. We were up over 740 points yesterday, largely around in a delay of tariffs that were set to go in effect on the EU until July 9th. I'm actually recording this just a little bit before the close, since

there's some travel for me to get to different client meetings around the country over the next week or so. But I wanted to get this your way and go over what is out today. There isn't a lot in the economic calendar, so it was somewhat to get this your way and go over what is out today. There isn't a lot in the economic calendar so it was somewhat of a benign trading day overall but there was a Richmond Fed survey out that showed a slight improvement over last month but also still a negative contractionary territory. Still working our way through some of these manufacturing numbers. The FOMC minutes were also out today and frankly are somewhat stale at this point just because

it was the May 6th and 7th meeting and that was before all of the different de-escalation trade announcements between China and the US. So in other words, there was more rate cuts priced in then than there are now since things have gotten a little easier. The financial conditions have eased here a little bit. But yesterday's move higher was significant following the EU announcement. And we had seven to one advanced declines on the New York stock exchange. That's a pretty wide breadth and substantial move higher.

S&P was up over 2% yesterday. So it's not surprising that today would be a little bit more of a direction list or somewhat sideways, slightly negative day following such a big move like that. But that puts basically the S&P 500 up about four-tenths of a percent on the year. Dow is still negative by about two-thirds of a percent. NASDAQ is also still negative by about two-thirds of a percent. So we're essentially flat here, and this is through almost the end of May at this point. So getting towards that halfway mark. Some more announcements around long-term sovereign debt yields. We've talked about the United States.

I had to write up just putting things in perspective that the rates that we're currently paying on Treasuries really are about the long-term average here. And also they haven't moved a whole lot here year to date, regardless of what the headlines seem to be catching onto, but the, there was a 40 year JGB auction. So that's Japan. And, and again, this is the second most important, most liquid, largest treasury market in the world essentially. So these things matter.

So rates have risen a little bit, both in Japan, but then also globally. But I wanted to break down a couple of things. First, to just understand that when people say, what if China doesn't buy U.S. Treasuries or what if Japan doesn't buy them or something like that, just to put it in perspective, the United States Treasury issuance, the total amount of outstanding debt is owned about 75% domestically. So that's big pensions, it's covering liability payments, essentially. It's banks, it's the Federal Reserve has about a 14% holding of it. So the 25% that's outstanding is definitely significant. No question about that. But when you start parsing it out by country, you've got countries that

really are our largest allies, which are countries like the UK and Japan. They also have a need as they get dollars that flood into those countries from all of the things that we buy from them, particularly Japan, which is an export led country to park those dollars in the things that we buy from them, particularly Japan, which is an export led country to park those dollars and some assets again, to cover liability payments in the future, to earn interest, all of those things. China only owns at this point about 800 billion, a little more than that 880 billion in their holdings have come down recently, but they have the same issue.

We buy more widgets from them that they sell to us. And so they have dollars. They need to put those dollars somewhere. But just since Japan was in the news today on a 40 year JGB auction, that was a little weaker. I wanted to break down their holdings. And it's fun to say, remember the exchange rate on the dollar yen is significantly higher. So when I talk about total amount of, of yen, just remember it's trading at something like 145 to one U.S. dollar exchange ratio, but there's actually over a

quadrillion outstanding yen and JGBs. And of that amount, the bank of Japan owns about half of them. So call it 500 trillion. The rest is owned by insurance companies, banks, pensions, with foreigners only making up about 5%. So you can say that yields have come up and yes, as a percentage of GDP, Japan is even worse in worse shape than the United States is, but when it's owned domestically, it's a little different paradigm if you want to think about that for a second. They have a lot of control

over where those yields can trade and that's what they have been doing with yield curve control, which means that they target certain different rates for different maturity levels on their outstanding debt and can just hold rates where they are. And then if you don't have a foreign investment that can essentially sell things or as we call them bond vigilantes where they can get away with trying to drive yields higher and liquidating those positions. If it's only 5% of holdings, I'm not so sure that's a very big risk there. There's other risks and of course that comes out in the way that these currencies trade. And so solvency, proper stewardship of balance sheets in these governments, trade deficits, all of those things, budgets matter a ton and currencies oscillate around all

those realities. The dollar has weakened this year by about 10%, but it's also significantly higher over the past 15 years. It's definitely as far as the reserve currency goes, by far, the cleanest shirt and the dirty pile of laundry, if that's the way I want to look at it. But there you go. I just wanted to go through a little bit of debt, a little bit of what's in the headlines these days, and we'll be back with you tomorrow.

There's actually more out in the economic calendar tomorrow. We've got a second release of Q1 GDP that we'll go through. We've got initial jobless claims and we've got pending home sales. And then the big number for this week at least will be PCE data, which is the Fed's favorite measurement of inflation that will come out on Friday of this week. And so we'll be able to walk through those two things over the next couple of days. But I hope everyone had a lovely Memorial Day holiday if I haven't spoken to you.

And I shall be back with you tomorrow, which is Thursday on Dividend Cafe. Have a lovely evening. Thank you. The Bonson Group is a group of investment professionals registered with Hightower Securities LLC, member FINRA and SIPC, with Hightower Advisors LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities LLC. Advisory services are offered through Hightower Advisors LLC. This is not an offer to buy or sell securities.

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