The Dividend Cafe - What to Make of the Bond Market, and More

Episode Date: April 14, 2025

Today's Post - https://bahnsen.co/43O87az Market Volatility Insights: Analyzing Recent Financial Turbulence and Trade Policy Impacts In this Monday edition of Dividend Cafe, the speaker recaps significant recent market events and provides analysis on the current state of various financial markets, including stocks, bonds, and currencies. The discussion covers the dramatic market reactions to the President's April 2nd announcement on trade policy changes and subsequent tariff suspensions. Notably, the episode highlights the notable market volatility with large up and down swings, considerations of bond market dynamics, and the implications of potential de-leveraging by hedge funds. The episode also touches on recent legislative developments with implications for future budget frameworks and tax policies. Overall, there's an emphasis on the ongoing uncertainty and volatility in financial markets and the economic implications thereof. 00:00 Introduction to Dividend Cafe 00:59 Market Recap: A Rollercoaster Week 04:09 Bond Market Insights 05:11 Historical Market Volatility 07:10 Trade Policy and Market Reactions 13:22 Reconciliation Bill and Market Implications 14:40 Conclusion and Final Thoughts 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. Hello and welcome to the Monday edition of Dividend Cafe. We are going to cover quite a few things today. The excitement continues in markets. I am back here in New York City, but obviously the time I was away were a few days for the history books. And I'm going to recap some of those days here in the Dividend Cafe today to give you an idea of exactly where we've been, where we are across financial

markets, not merely the stock market that has most people's attention, but getting a better understanding of where we are in the bond markets, currency, all of these things that are really at such a pivotal point in this part of the cycle coming out of the president's announcement on April 2nd regarding intended changes in trade policy. So let me just quickly get out of the way the action of markets today. The market opened up over 300 points. It went up a little more from there. It gave back most of that,

and then some in the next hour and a half went negative across all three indices at one point. And then from there, just a straight line up for the rest of the day, slowly but surely, and ultimately closing at the point that it had opened today, up 300-ish points. So both the S&P and Dow were up 78 basis points on the day. The NASDAQ closed the day up 64 basis points, but it had been up about 2.5 percent earlier.

So it gave up quite a bit of its lead. But remember, all the indices today that were up were coming off a big rally days on Friday. And what had really happened over the weekend was the president announced basically a carve out or an exception for these tariffs with China on semiconductor, iPhone, computer parts, some of the biggest products that are relevant in global trade. And so that gave markets some sort of relief and it really represented about $80 billion of potential costs that is at least for now been suspended. However, Secretary Lutnick, the Commerce Secretary did go on the Sunday morning news shows to say,

no, we're not really giving exception. We're just delaying it a little. There's another announcement coming later. And then everybody's favorite trade advisor, Pete Navarro said, no, we're not doing any exceptions at all. And then today the president announced that they're actually looking at doing some exceptions for some of the US automakers with those tariffs.

So markets are all at once having to digest what it very much appears to be a lot of backtracking on entire sectors and elements of the economy. Obviously last Wednesday, the big one where these massive amounts of tariffs on trade from all over the world were suspended and that has been put on hold 90 days. There's still an awful lot up in the air. There are different signals that are coming from different members of the administration,

but I think that market's general takeaway has been some form of optimism that certainly a lot of the worst expectations, what we would call the left tail risk has been somewhat improved. However, there is not a lot of clarity as to where we're going and that represents still ongoing expectations for day by day volatility. So again, I think I already covered what the market indices did today, but just to summarize the market action today, the top performing sector in the market was communication, excuse me, was real estate and utilities. Real estate up over 2 percent, utilities one and three quarters. Those really being more like bond proxy sectors and the bond market rallied

big today. And then the worst performing sector was still positive. A rare day in which 11 out of 11 S&P sectors were up, that was communication services up a quarter of a percent. So I mentioned that the bond market had rallied, and we're gonna spend a lot of our time here today talking about what's going on in the bond market. But first, let me just say that if you go back to the beginning of 2022, a 60-40 portfolio coming into today, 60% S&P 500,

40% the bond market index, is now up a whopping total of 2% per year. So again, that's cherry picked on the fact that 2022 was a big sell-off in both markets, and now these last couple weeks have been a big sell-off in both markets. And now these last couple weeks have been a big sell-off in equity markets. And so the bookends of that period of time aren't helping the case, but nevertheless, they're real start and end dates that are alluding to this very choppy market for a

60-40 asset allocation and speaks to a lot of the narrative that we have in terms of the type of market that we're in. In a much shorter period of time than three and a half years, we could look at the last one and a half weeks and see that on Thursday, April 3rd, I mean, it feels like ancient history, but you're literally just talking about eight market days now, eight trading days since the President's Rose Garden announcement that took place after the market closed on Wednesday, April 2nd. On Thursday the 3rd, the market was down 1,700 points and bond yields dropped quite a bit, meaning the bond market rallied. Then the next day Friday, the market dropped 2,200 points

and bond yields were still dropping. That Thursday, Friday combo represents the third worst two day sell-off that we have had in the market since Black Monday, 1987. There was one two day period that was worse than COVID and one two day period that was worse than the financial crisis. So this is getting into the archives and almanacs here, if you will.

Monday, April 7th, just one week ago, markets were down 350 points. There was a spike in the middle of the day on the false alarm that there had been a suspension of the tariffs. That would prove to be a real alarm on Wednesday. But bond yields on Monday did start to go higher in the second half of the tariffs. That would prove to be a real alarm on Wednesday. But bond yields on Monday did start to go higher in the second half of the day. And that seemed odd based on the fact that equities were still selling off.

However, the deleveraging theme made the most sense and still does to me that there were just people that needed to sell off from their risk assets dropping and bonds were the thing that they could most easily sell. That continued on Tuesday, April 8th. The market was down only 300 points. The S&P was down another 1.7% and got into bear market territory. At that point, it was now down over 20% from its high and hitting that threshold of bear market. Then the overnight action Tuesday going into Wednesday

where the futures were down 1,000 points. We got down in the real market on Wednesday, April the ninth, 700 points, and it was about three hours, four hours after trading began that the president announced, okay, I'm now suspending all the tariffs I announced for 90 days as we try to work out deals with all these other countries,

other than with China, where we're keeping that on and in fact escalating it because of the retaliation. Markets went up 3,400 points from that point. They closed the day up 2,700, but they had been down 700. S&P was up almost 10%. The NASDAQ was up 12%. Just a massive rally. And yet, bond yields were still going higher.

This is setting up why I wanna bring up some things of the bond market in a moment. Thursday, the Dow dropped 1,000 points. At one point, it had been down 2,000. So we were still living in this really violent up-down volatility, not merely 300 point ups and downs, which is actually a rather sizable up down movement, but four digit up down movements, not just 1% in a day, but three or four or 5% in a day.

Oil prices were dropping, not a surprise on concerns of declining growth expectations, but bond yields were climbing. The dollar had its worst day in three years relative to a basket of other currencies. Then Friday, the markets were up and down all morning, had been down 350 points at the low, but then rallied 1,000 points to close up 650. So this crazy intraday volatility cuts both ways. It doesn't always mean down. It doesn't always mean up. By definition, volatility is two way speaking

and reinforcing to the folly of market timing. Then we get to today. Futures had been up after the announcement over the weekend about these carve outs for phones and semiconductors and things like that. And markets didn't hold all of that. Everything stayed positive. But like I said, the NASDAQ gave up a lot of juice.

But then what did happen today was that stocks were up and bonds were up and the yield on the 10-year dropped 11 basis points. So most risk assets were up today across the board, like I mentioned, 11 out of 11 S&P sectors. The bond, 10-year right now, the 10-year bond yield is at 4.38%. So at the end of the day,

I just simply have a very hard time wrapping my arms around global sell-off, anything coordinated from other countries, when you have a rather logical explanation of de-levering in Monday and Tuesday of last week, and then you had a very sizable basis trade, which again, I don't want to get too granular here or make your eyes glaze over. The media is, it's going to be easier for the media to wonder out loud if foreign countries are selling our debt off, then it is to bring up the idea that hedge funds have been

for sellers of treasuries, which is put upward pressure on yields and downward pressure on bond prices, because explaining the basis trade is not great television. It may not be a great podcast either, but I don't do this for the ratings. So here's what I would say. There's two ways one can get exposure to a treasury bond. You can pay for a bond, you can pay cash to buy a bond,

or if you don't wanna put up all the cash to buy a bond, you can buy a futures contract where it's delivering the exact same thing of a given treasury bond. And you end up having to put up less cash and you're in the futures market. Hedge funds are more than willing, because they have massive balance sheets, to buy the bond, sell the futures contract, and have a risk-free trade. They're basically long one treasury bond, short one treasury bond, evened out,

but there's just itsy bitsy little spread called basis points that they can pick up. It's not worth anyone's time to do it unless you're trading at mass size, which to do that you have to have a massive balance sheet. The Fed is not a hedge fund, the treasury department's not a hedge fund, so they have the balance sheets to go do it, but they're not in that game. Hedge funds are. No problem. They're providing a lot of liquidity to bond buyers who want to use the futures market and creating a risk-free trade to collect a little spread on whatever happens.

But then if there is a need in a time of selling to unwind some of these, they're still not taking a lot of risk to themselves. They have a buy and a sell on their balance sheet, on their books. However, it could force them to sell a lot more volume than there are buyers for and therefore push yields higher, bond prices lower. I believe that's exactly what happened Thursday and Friday. And I think that probably alleviated today, which is what created some of that rally.

The notion of foreign buyers selling bonds in mass does not go with a 4.4%, a 4.5% tenure. First of all, China owns soaking wet about a trillion dollars of our debt out of 36 trillion. Japan's around the same, Canada's a tiny fraction of that. So there just simply isn't a sizable country that could move that market without doing incredible damage to their own objectives.

China does not want to strengthen their currency against the dollar. They want to weaken it. And so if they were to go about selling off Treasuries in mass, it would have the exact opposite effect to their currency. I still want to watch this. I still believe it is very interesting what has played out. And I'm also glad that if it was indeed basis trade explanation, that the Fed didn't have to come in and backstop the market, which they did in March of 2020, albeit the violence that was going on there was far worse.

So that may be a little more granularity and wonkiness than you wanted, but I think it was important. You notice that I'm like, what am I in? 15 minutes in almost to the podcast, and I haven't even talked about the reconciliation bill, Speaker Johnson last Thursday afternoon, getting through the next hurdle where both the Senate and House have agreed upon a budget framework. So you've had

now three chances for this thing to die and all three got through by a two vote margin in the House and therefore they now have a chance to get a bill into reconciliation they could even still get it done to vote on before Memorial Day. There's also a ton that can still mess this up because many of the people in the House GOP who voted for it have said they're not gonna vote for the final bill if they don't get additional spending cuts they were promised.

And additional spending cuts could jeopardize Senate votes for it. Additionally, there's not specificity yet as to what tax cuts are coming or not coming. And there are some people that have said, we want a salt deduction limit up to 30k. Right now, it's only 10k. Others have said they're against that. Some want no tax on tips, others have to figure out how to pay for it. There is a lot of wood to chop on it, but they have agreed on a budget framework that matches the Senate and the House, now they

can go into conference and reconcile this bill or not. But that is still a big deal that looms over markets. I've probably given you enough to chew on for now. I don't have a whole lot more to say other than tomorrow is another day in markets. And as you've seen from the last eight days, up down movements, I don't expect normal days for some time. This includes stocks, bonds, currency, oil markets for that matter.

And at some point, this conversation is going to transition from the day-to-day trauma, the day-to-day uncertainty, volatility, what the president said, what Pete trauma, the day-to-day uncertainty, volatility, what the president said, what Pete Navarro said, what the secretary said, all those things moving up and down around announcements. We have a big meeting with Japan on Thursday. We do not know at all where things stand with China.

So there's plenty still percolating in that particular conversation. But then there's also the economic fundamentals behind all this. What's gonna happen with jobs? What's gonna happen with wages? Are we tipping in recession just from the uncertainty of the last month or not?

I am a little less sanguine about the possibility that we just economically skirt through what's already been done. But in the meantime, the freefall of markets, at least for now, appears to have stopped and that has a lot of people feeling better. But I think there's a lot of wood to chop to feel that we're on the right footing economically and that is playing out on a number of different fronts. So all that to say there's no no rest coming anytime soon from where we sit. I'm going to leave it there.

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