Summary of Collapse of USD & Treasury Market | Potential Consequences on Stocks & Economy | Allocation Strategy

Summary of "Collapse of USD & Treasury Market | Potential Consequences on Stocks & Economy | Allocation Strategy"

This video from Braavos Research, hosted by Peter, provides a broad macroeconomic and financial market analysis focusing on the recent decline of the US dollar (USD), developments in the US Treasury bond market, and their potential impacts on stocks and the broader economy. It also discusses allocation strategies in light of these trends.

Main Financial Strategies, Market Analyses, and Business Trends

1. US Dollar (USD) Market Analysis

The US Dollar Index (DXY), which tracks the USD against a basket of major currencies (primarily the euro), is experiencing a significant technical breakdown, potentially testing long-term support levels around 90.
This marks a possible reversal of the secular USD uptrend that has lasted since 2008.
The euro/USD pair is showing strength, breaking out of a long-term downtrend channel, signaling a potential sustained euro rally.
A weaker USD generally benefits the S&P 500 because about 40% of S&P 500 revenues come from abroad, so currency depreciation inflates these revenues in dollar terms.
Historically, a weak USD correlates with stronger equity markets and a stronger manufacturing sector (ISM PMI), as US exports become more competitive.
However, exceptions exist where both USD and stocks fall simultaneously, typically during recessions (e.g., 2002, 2008).

2. US Treasury Bond Market and Rising Yields

A significant divergence has emerged since April 2024: Treasury yields remain elevated despite the weakening USD, which is unusual since yields and USD strength have been historically correlated.
Elevated yields amid falling USD suggest market concerns about lower economic growth but sustained high borrowing costs.
Four key risks to the Treasury market that could push yields higher:
- Foreign dumping or reduced foreign demand for US Treasuries due to declining trust in US government policies and trade relations.
- Record US government deficits continuing to increase supply of Treasuries.
- A large maturity wall in 2025, with $7 trillion of debt needing refinancing at higher interest rates, increasing supply and borrowing costs.
- Rising inflation expectations driven by tariffs, causing investors to demand higher yields to compensate for inflation risk.
The Treasury term premium (extra yield investors require for holding Treasuries) has been near zero for years but could rise sharply (1–1.5%), pushing yields to 5–6%, which would have significant negative effects on stocks, housing, and the broader economy.
Rising long-term bond yields historically precede recessions by increasing borrowing costs and reducing asset valuations.

3. Stock Market Outlook

The S&P 500 has been consolidating following a 20% decline from February to April 2024.
Technical patterns suggest possible further downside (e.g., head and shoulders topping pattern).
The weak USD is a positive tailwind for stocks, but rising Treasury yields and recession risks are significant headwinds.
The market is not showing signs of a V-shaped recovery; instead, a prolonged consolidation or further correction is possible.
Defensive sectors (e.g., utilities - XLU) are outperforming, while cyclical sectors (e.g., homebuilding - XHP) remain weak.
The gold-to-silver ratio remains elevated, indicating a risk-off environment.
Long-term investment horizon (10+ years) outlook is more positive, with stock valuations finally reaching levels that could offer positive returns.

4. Trading and Allocation Strategy

The presenter maintains a defensive and conservative stance on the US stock market.
Active trades include short positions on Treasury bonds (betting on rising yields) and selective long positions in uncorrelated stocks like HDFC, which is showing strength despite market turmoil.
Dollar holders concerned about currency depreciation might consider diversifying cash holdings into other currencies, with the Swiss franc highlighted as a safe haven.
Dollar weakness could boost manufacturing and exports, which is generally positive for the economy and equities.
Dollar depreciation is not currently viewed as a major risk but rather as part of a broader shift in macro dynamics.
Emphasis on dollar-cost averaging (DCA) strategies to manage potential further downside in stocks.

Methodology / Step-by-Step Analytical Approach

Technical Analysis: Identify long-term and short-term chart patterns on USD Index, euro/USD, and Treasury yields.
Macro Correlation Analysis: Study the historical correlation between USD strength, Treasury yields, economic growth expectations, and equity market performance.
Risk Identification: Highlight key systemic risks impacting Treasury yields — foreign demand, deficits, maturity wall, inflation expectations.
Term Premium Analysis: Use Federal Reserve data on Treasury term premium to gauge market risk appetite and price in potential yield spikes.
Sector Rotation and Relative Strength: Track defensive vs. cyclical sectors and risk-on/risk-off indicators like the gold-to-silver ratio.

Notable Quotes

— 05:54 — « We're seeing a weakness in the currency despite higher returns on that currency, so what we're seeing is a big divergence between yields that have gone up and the dollar that has gone down. »

— 17:23 — « The big risk that we are seeing right now is not necessarily the US dollar declining itself but it's the fact that the US dollar is declining despite higher Treasury yields. »

— 19:01 — « Foreign dumping: the current administration has severed ties between the US and major trade partners, reducing trust in US government bonds and potentially turning foreign investors from net buyers to net sellers. »

— 22:20 — « The US Treasury has about $7 trillion worth of debt to refinance in 2025, and refinancing at current high interest rates will significantly raise the cost of interest on US government debt. »

— 29:14 — « We're not currently jumping with both feet back into stocks because the US stock market has still got a lot of work to do technically and is in a downtrend. »