Martin Wolf of the Financial Times has called T—-p’s tariffs “an act of warfare against the entire world.”

Perhaps it is not surprising that in the past week, the entire world has responded. Among other things, per Eric Michael Garcia, “China has suspended exports of a wide range of critical minerals and magnets, threatening to choke off supplies of components central to automakers, aerospace manufacturers, semiconductor companies and military contractors around the world.”

But most significantly, per Bloomberg yesterday, China has had every incentive to weaponize its $760 Billion (!) in US Treasury holdings.

And it may have done so.

Let me start with this graph, via Wolf Street, of the US Treasury yield curve:

This is almost the worst configuration you could imagine. Not only has the short end more deeply inverted (historically a leading sign of recession), but also the long end has risen in yield (also a leading sign of recession in other models). About the only worse configuration would be if the Fed had to raise interest rates further to combat inflation or to defend the US$.

We all know that last week US Treasury yields rose sharply - by 0.40% from 3.99% to 4.40%, rising as high as 4.60% intraday:

(Click on image to enlarge)

This has had some immediate economic impacts, most notably on mortgage rates, which on Friday rose back over 7%:

This is almost certainly going to impact mortgage applications and new housing sales and permits, hurting that important leading sector.

Additionally, spreads between US Treasury’s and investment grade corporate bonds have widened significantly (red), and the spreads of both compared with high yield speculative corporate bonds (gold) have widened as well:

(Click on image to enlarge)

This is typically a sign of financial stress and often (but not always!) a short leading indicator of impending recession as well:

(Click on image to enlarge)

But as has already been noted in other corners, the sell-off in the bond market could also impact the standing of the US$. Here is a graph of the US$ vs. the Euro (blue) and Chinese Renminbi (red) over the past 10 years:

(Click on image to enlarge)

Note that over that time the general trend was the strengthening of the US$ against both currencies.

But now let’s focus on the last year:

(Click on image to enlarge)

On T—-p’s inaururation day, the Euro was almost 1:1 parity with the US$. Since then the Euro has appreciated, and last week it gained another 0.25 from 1.08 to 1.105 against the dollar. Meanwhile the Renminbi in the last several weeks has decoupled, depreciating in value vs. the US$.

Why would the Renminbi lose value? Maybe because China was selling US Treasury’s and buying other currencies. 

Although I won’t show the graphs, US Treasury’s haven’t been the only bonds that sold off last week. So did longer maturities in Canada, the UK, Japan, and Australia.

But two bonds conspicuously stood out, having sharp downtrends in yields.

One was all of the bonds in the Euro area. Below I show Germany, but there are similar charts for France and Italy (!):

So it looks like there was a move out of Treasury’s and into Euro area bonds.

But the other similar graph was yields on Chinese bonds, which typically can only be traded internally in China:

So on the global scale, US bonds as well of those of its closest trading partners sold off, while Euro area and Chinese bonds went entirely in the other direction.

As shown above, this caused the Euro to appreciate against the US$ - but not the Chinese renminbi.

If this were just China humiliating T—-p, it might be worth a good chuckle. But the entire US economy is likely to suffer because of this move. T—-p will probably surrender in this fight, but rationality is not his strong suit. And Xi may want the US as a whole humiliated as well. 

More By This Author:

Real Hourly And Aggregate Pay For Nonsupervisory Workers Increased In March
March CPI: This Is The Report We Have Been Waiting For
Jobless Claims Continue To Reflect Slowly Expanding Economy