European debt now a better bet than US Treasuries – Asia Times
As relationship expert Bill Gross sparkles a bright spotlight on a rapidly evolving threat to US Treasury securities, the November election, Janet Yellen the n’t become happy.
The former Pacific Investment Management Co ( PIMCO ) chief investment officer has mentioned European debt as a ready substitute for securities that were sold by US Treasury Secretary Yellen’s team in recent interviews.
” As we move to November, and everything becomes more clear as to who may or who might not win, the doubt plus the potential legislation implications may affect Treasuries significantly”, Gross told Bloomberg.
Gross’s apparent move to Europe comes even after the electoral debacles in Berlin and Paris. Emmanuel Macron and Olaf Scholz faced opposition in the European Parliament elections on June 9.
As President Macron called a snap election in a bid to consolidate power, French bond yields reached their highest level since November. German and Italian bond prices plunged, too, as traders assessed the fiscal policy implications of the elections.
Gross notes, political surprises coming from the continent, and other significant events in India, Mexico, and South Africa that put many bond investors at risk due to market reactions. Could the US election pitting Democrats for Republicans against President Joe Biden be the next market snob?
” What we’ve seen the last few weeks is a reaction to uncertainty, in terms of not only the party that’s dominating, but uncertainty as to what their policies will be”, Gross explains.
As such, Gross adds,” there’s coming a point where European bonds are more attractive than Treasury bonds, in my opinion. In terms of attraction, the spreads for German and French 10-year bonds have decreased significantly over the past month or two in relation to Treasuries and today as well.
This is how US electioneering may cast a serious shadow over the attractiveness of the dollar, the linchpin of global finance and trade, written between the lines in bold font. And the difficult task Team Yellen must complete in order to stop the US government’s debt from rising worldwide.
Adding to Yellen’s challenges, a US national debt approaching US$ 35 trillion just as Washington politics become increasingly toxic.
Extreme polarization is already imperiling Washington’s credit rating. Last August, when Fitch Ratings yanked away America’s AAA , credit score, it cited the polarization behind the January 6, 2021 insurrection among the reasons.
Additionally, Fitch cited political conflict involving raising the statutory debt ceiling and funding the US government as risk factors for the credit rating of Washington. Such clashes might worry Asia less if not for the fact Washington’s debt is , twice the size , of China’s annual GDP and more than eight times Japan’s.
Combined, Tokyo and Beijing hold about$ 2 trillion of US government debt. That vast pool of savings could be at risk if Moody’s Investors Service revokes Washington’s last remaining AAA rating. Surging US yields would affect global markets in unanticipated ways.
America’s sharp mercantilist pivot since 2017 is another worry for Asia’s export- reliant economies. Then, President Trump imposed severe tariffs on global steel and aluminum as well as Chinese goods.
When Biden arrived, he left Trump’s trade war in place— and added new layers of China- targeted curbs, most targeting China’s access to semiconductors, chip- making equipment and other vital, cutting- edge technologies.
Now, Trump’s plan to slap 60 % taxes on all Chinese goods is catalyzing something of a tariff arms race, one that’s drawing retaliation threats from Xi Jinping’s government. The EU followed this week with 38 % of its own tariffs after Beijing just imposed a 100 % tax on China-made electric vehicles.
Never mind that “policies are more likely to hurt than help the lower- and middle-income Americans they purport to benefit,” asserts economist Kimberly Clausing of the Peterson Institute for International Economics, a think tank based in Washington.
Stock markets everywhere could be in harm’s way as trade war risks increase and uncertainty surrounds growth prospects. According to Gross, the US’s “equity market is valued at historically high levels if looking at current 21-times ‘ price to earnings ratios” are considered. If GDP slows, he notes, there could be” a problem in terms of valuation at the moment for many stocks”.
That goes, too, for Europe’s economic prospects as the region’s biggest economy, Germany, fends off recession risks. With a narrower electoral mandate, Chancellor Scholz ‘ Social Democrats and its progressive coalition partners are now free to stimulate growth.
Macron is smarting in France now that he lost to Marine Le Pen’s nationalist far-right party in parliamentary elections. The surprise snap election he announced overlaps with Macron’s hosting of the Paris Summer Olympics. Macron’s instinct to fight contrasts with Belgium’s Alexander De Croo, who resigned instead.
Macron urges French citizens to cast ballots the same way they did this weekend for the European Parliament, which has long been seen as a protest vote, according to Mujtaba Rahman, an analyst at Eurasia Group.
Macron “believes he can defy the polls by having to choose between the pro-EU, pro-Ukrainian, and centrist status quo” and the existential risk of a far-right government,” he said.
It’s quite a gamble on France’s future. Polls, Rahman says, suggest Macron’s centrist coalition will fail to win a majority, and if Le Pen’s National Rally picks up the most seats.”
That means” France will be in uncharted waters,” Rahman explains”. Le Pen has stated that she will partially withhold EU funding, impose stricter immigration laws, violate the EU single market by putting French business before French aid, and impose restrictions on aid to Ukraine.
Italy’s Giorgia Meloni had a much better week, continuing her pivot from far- right to mainstream. Along with a solid election showing, Meloni’s government will host the Group of Seven ( G7 ) in the days ahead.
Centrist European Commission President Ursula von der Leyen also appears to have reclaimed the far-right trend and been given another five-year term. She will likely be forced to make concessions to immigration and environmental policies to advance the agenda.
What all of this means for EU fiscal dynamics is a ripe subject. Another wildcard is the outlook for US rates. The core consumer price index dropped to its lowest level in more than three years in May.
Despite May’s lower CPI, the US Federal Reserve’s guidance seems” roughly unchanged,” says economist Dominique Dwor- Frecaut at advisory Macro Hive”. Cuts continue to be the best case scenario until the Fed has increased its confidence in the disinflationary outlook.
Will Denyer, economist at Gavekal Dragonomics, adds that” even though they had this softer inflation data in hand, Fed policymakers still pared back their rate cut expectations for the year.”
The global implications are uncertain. The belief that the Fed is” committed to its 2 % inflation target” in the foreign exchange market implies that any increase in US inflation has a tendency to cause the dollar to rise while slower inflation causes the US currency to contract, according to Denyer.
As a result, May’s softer CPI release saw the dollar ease against most currencies. However, it’s still unclear whether this focus will continue to be the main force behind the world’s exchange markets in the coming days and weeks.
Denyer contends that worries about the outcome of the French parliamentary election could devalue the euro. A potential drop in the Bank of Japan’s asset purchases could increase the yen. The main story is, however, May’s moderate US inflation and what it implies for US policy and global markets.
Not the whole story, though, as election- year shenanigans heat up in the US. Global markets will continue to be tense as Biden and Trump battle it out in the polls.  ,
According to Kelvin Wong, an analyst at OANDA, the 10-year yield spread premium between US Treasury notes and Japanese government bonds has reduced Japanese insurance companies ‘ ability to invest in fixed-income securities, which may result in higher odds that the long-term JGB yields will likely trend higher.
According to Wang,” These potential upcoming fixed income portfolio adjustments from Japanese insurance companies may provide some support to halt the major yen’s weakness against the US dollar.”
However, as Gross points out, European debt will soon be popular with global investors as Yellen’s team struggles to maintain demand for a US Treasury debt market that appears to be in decline.
” Relative to the US, we see support for European bonds due to smaller fiscal deficits,” says Ann- Katrin Petersen, investment strategist at the BlackRock Investment Institute.
Follow William Pesek on X at @WilliamPesek
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