The time for geographic diversification is now

U.S. Treasuries lose their safe haven status amid a secular rotation away from U.S. assets

Author

Paul Della Guardia
April 11, 2025 • Estimated Reading Time: 10 minutes

This week, even Donald Trump had to bow to the pressure of the almighty bond market.

Usually, when there is a selloff in U.S. equity markets, U.S. Treasury bond prices tend to rise, thanks to their safe-haven status.

Rising U.S. yields

This time, the opposite is happening: U.S. bond yields have shot upwards (i.e. prices have fallen) amid the stock market ructions.

Rising yields on U.S. Treasuries have gone against levered positions of hedge funds in this market, forcing these to liquidate part of their holdings to meet margin calls. See here for an explainer on basis trades, off-the-runs, and swap spread.

Trump’s 90-day ex-China tariff “pause” on April 9th was a clear reaction to Jamie Dimon’s concerns voiced on Fox News about worsening conditions in the Treasury market.

It appears that the president is willing to let equities suffer but was concerned enough about Treasuries to act.

Yet despite the 90-day hiatus, at the time of writing on Friday morning Treasuries are continuing to fall, suggesting the margin call-liquidation-price drop doom loop could still be running.

A world upside down

Amid higher U.S. yields, gold continues to hit record levels, while the dollar continues to weaken. This is not normal.

This graph shows how, normally, EURUSD (in yellow) moves in tandem with EUR minus the USD 10-year interest rate differential (in white).

Because the U.S. 10-year yield has surged, the differential has dropped, i.e. the white line has become more negative.

In normal times, the dollar would strengthen, given higher U.S. rates versus EUR.

Now, however, the greenback is weakening, pointing to a structural shift away from the U.S.

Source: Exante Data, Bloomberg

The combination of higher government debt yields, a weaker currency, and an equity market sell-off is the hallmark of an emerging market under stress.

There are other examples of U.S. correlations breaking down.

The S&P 500 and the dollar index rarely drop together for extended periods, but so far this has been the norm under Trump 2.0.

U.S. equities and bonds are usually negatively-correlated. Yet that relationship is currently positive, though this was also the case for long stretches back in 2022.

Higher U.S. Treasury yields usually put downward pressure on the gold price because of the higher interest investors can earn on these usually “risk-free” haven assets.

Now higher U.S. yields coincide with higher gold prices.

In this context, geographic diversification has never looked more appealing, as the recent period of U.S. equity market unipolarity comes to an end - for now.

Thankfully, no matter what the White House does, other countries will continue trading with each other, hence there will be no shortage of opportunities to take shelter from the U.S. storm.

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Disclaimer: The content provided in this newsletter is for informational purposes only and should not be construed as financial, investment, or other professional advice. While I strive to ensure accuracy, I make no guarantees regarding the completeness or reliability of the information presented. Readers are encouraged to conduct their own research and consult with qualified financial professionals before making any investment decisions. The author and publisher are not responsible for any actions taken based on the information provided.

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