Treasury Threats Trump Torrent Of Tariffs

WHERE WE STAND – It’s all ‘tariffs this, tariffs that’ with Trump at the moment; but, ‘Treasuries this, Treasuries that’ is probably what participants should be focused on.

While the White House pulled a rather rapid U-turn, President Trump noted, as the week got underway, that the Department of Government Efficiency (DOGE) had reportedly found ‘irregularities’ with some Treasury holdings, and that this could mean the US’ debt obligations are lower than thought. Though there was no elaboration on these comments, the implication is clear – the Trump Administration could disregard some payments, seemingly for whatever reason they wish.

Personally, this is the most important, and most concerning, thing that Trump has said since returning to the Oval Office. Tariffs can be thrown around indiscriminately, and also be reversed just as quickly. On the other hand, once market confidence in the US’ ability, and conviction, to fulfil its necessary interest and principal repayments is lost, it will be lost for good.

At best, this is Trump being stupid and ignorant. At worst, this is the start of the US beginning to weaponize its debt obligations. Imagine a scenario where, as a holder of Treasuries, you one day receive a call that your notes have been voided, and that you may no longer collect interest, or redeem them. Much more of this talk and participants will have little-to-no choice but to attach a higher risk premium to US debt, and perhaps even be forced to sell Treasury holdings.

Anyway, despite the significant threats posed by those comments on Treasuries, tariffs still seem to be front of mind for market participants. Chiefly, the issue of levies on US imports of steel and aluminium – which Trump is to impose at a rate of 25% - as well as the matter of reciprocal tariffs, on which we should have more clarity later in the week.

That said, it does seem as if participants have become rather fatigued when it comes to the whole tariff issue, especially when yesterday was the third Monday running when folk have come to the desk to be greeted with news of fresh trade measures. Not only that, but Trump also keeps threatening tariffs, only to then back off of actually implementing such measures. That seems unlikely this time around, though, with the Administration’s focus apparently now on trade itself, as opposed to simply chucking tariffs around as a negotiating strategy aimed at furthering the President’s political aims.

Even if markets might have been lulled into a bit of a false sense of security here in ably shrugging off the latest trade developments, the path of least resistance does once more seem to be leading higher for equities. Even if some are taking a ‘wait and see’ approach, not only to tariffs, but also ahead of tomorrow’s CPI figure, my base case is we see a slow but steady grind higher for the time being, into the next megacap earnings release from Nvidia (NVDA) on 26^th February. Given the solid earnings growth seen thus far this reporting season, and resilient US macro backdrop, dips should be viewed as buying opportunities.

Elsewhere, yesterday proved to be a relatively quiet start to the week, with the data docket devoid of anything impactful, and only ECB President Lagarde waffling away to EU lawmakers present to provide participants with something to focus on as the afternoon session progressed. Predictably, the perma-tanned one said little of interest.

Consequently, conditions in the FX market were relatively tranquil, with the greenback softening just a touch from the 108.50 peak seen at the APAC open, though with the DXY staying within the recent 107.50 – 110.00 range. I remain a dollar dip buyer here. Treasuries were also relatively calm, though some demand was in evidence at the front-end, despite this week’s chunky run of 3-, 10- and 30-year supply.

Lastly, gold notched fresh record highs, as the yellow metal climbed north of the $2,900/oz handle for the first time. I’m still happy to ride this bullish momentum ever higher, with $3k likely on the cards before too long.

LOOK AHEAD – The data docket is once again barren today, though central bank speakers may nevertheless provide some interest.

Fed Chair Powell heads to Capitol Hill for the first of two days of Congressional testimony, though Powell seems unlikely to deviate significantly from the ‘no hurry to cut again’ script used at the January FOMC meeting. BoE Governor Bailey also speaks today, in an intriguingly titled speech on “underestimating changes in financial markets”, which may be of particular interest given the MPC’s 25bp cut, but stagflationary economic forecasts, delivered last week.

Elsewhere, the US auctions off 3-year notes later on, while earnings today come from the likes of CocaCola (KO) and Super Micro (SMCI).