The US dollar has proven to be a haven of stability since the Iran war began; from February 28 to the high point of March 30, DXY appreciated 5% and has since come back to 98.06, +2.37%.
The demand for US dollars did not translate to demand for US Treasury bonds; from February 28 to the high point the US 10-year yield went from 3.95% to 4.4%, and is now at 4.256%, 30 bps higher than the start of the Iran war.
People have been buying the US dollar but not US bonds. What accounts for lagging bond versus dollar performance? And what does this tell investors about where they should be investing?
Many investors like the US dollar for its haven status, but hate the US bonds, and there are many reasons to hate US bonds; fear of Central Bank independence under President Trump, unexpected inflation from the new tariffs, high oil prices fueling inflation, a monstrous debt load tracing to over 100% of GDP (100% of the US economy's total output), and an overall loss of trust towards the USA.
Proof that bonds are being shunned is seen in the yields of dollar bonds issued by the World Bank, The European Investment Bank, and Germany's state owned KfW. All their US dollar yields have moved very close to US treasury yields. As example, the most recent European Investment Bank bond (EIB) set a record for demand at $33 bn of orders for a $4 bn dollar bond; 8x oversubscribed with a yield of .04% above US Treasuries, a tighter yield versus US Treasuries than has been seen for a long time.
Because they are not backed by governments, EIB and other supranational bonds are disadvantaged versus US treasuries. They cannot raise taxes to pay back their bonds, creating more risk which investors want to be paid for through higher yields. Now, they do not care if the non-governmental risk is covered or not.
They just don't want US Treasury paper. They have no confidence in US economic and political fundamentals.
If the US government doesn't get serious and address inflation and excessive government debt, their standing in the international community will be further challenged.
Playing this forward, as investors take a dim view of US bonds, non-US dollar bonds may see rising demand.
Brazilian short-term paper, Tesouros could take money from US government bonds. The Etherfuse Brazilian Tesouro yield 11.94%. Given that the Brazilian Central bank raised their estimate for the benchmark lending rate, the Selic, from 12.5% to 13%. It looks like short-term yields will go up. If interest rates are going up, a short-term maturity like the Tesouros is where you want to be.
The Brazilian Real supports this trend. Since the start of the Iran war to now the Brazilian Real has appreciated 2.92% versus the US dollar.
Short-term yields going higher with a currency expressing stability is a further allure for investors to turn from US treasuries and towards Brazilian paper.
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