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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. China appears to be done retaliating against President Trump's exorbitant tariffs. Beijing has called the Trump administration's actions a joke that it no longer considers worthy of matching. So the question now is whether President Chijinping will find a more potent
weapon to strike back at his opponent. For a closer look, now, I am joined by Bloomberg opinion columnist Shuley Wren her latest column titled why wouldn't China weaponize its treasury holdings? Shuley joins us from Hong Kong. It's always a pleasure in this piece. Shuley, you remind us that last Friday in Beijing, leadership essentially reiterated its vow to fight to the end, and might not this fighting include selling US treasuries?
That's the worry. So last week we saw a pretty big treasury bound route right and with a treasury ten year yi old up by fifty basis points, and some of the sharpest bikes occurred during the Asia hours, leading to speculations that you know, maybe some Asian central banks on the move, and the japan has come out saying that they were not weaponize their treasury holdings, and by the Treasury Department's data, they're the biggest foreign creditor, but
China is next, So there are worries that China is going to create a little bit of a chaos to the US government bomb market.
So on Monday, we caught up with Treasury Secretary Scott Bessant during a trip to Buenos Aires and we asked him whether foreign holders were dumping US treasuries. Here's what he had to say.
I don't think there's a dumping, and I think we saw in the TIC data either today or Friday that actually foreign ownerships picked up. We had two we had three big auctions last week, and on the longer in auction ten year, thirty year, we saw increase foreign competition. So I actually think this is one of those occasional
var shocks that you get in the trading community. I think a lot of people got very leverage, maybe out over their skis, and then you combine that with some real money selling and you get these moves.
So you don't think it's sovereigns potentially it's hedge funds unwinding. I have no.
Evidence that it's sovereigns and look Emory the not you. But the nature of journalism is to create a headline that ten days ago when tenure yields hit three ninety said, well, Secretary Besson got what he wanted, he got ten years yields down. But it's the wrong reason. Now I figet what they hit on Friday, maybe for forty something.
We saw a fifty basis move last week and ten year yield at the same time that the dollar was weakening nearly three percent. How do you simultaneously look at that situation. It feels like investors are dumping US assets.
Well, look, I've learned that not to look at what happens over a week. I, for better or worse, have lived through a lot of these things in trading. In one's personal trading history is the scar tissue that sticks with you the most. I can tell you exactly where I was standing in nineteen ninety eight when the long term capital the backle happened. That had nothing to do with anything other than a bunch of geniuses up in Greenwich who had too much leverage.
Treasury Secretary Scott Besson during his trip to Buenos Aires speaking to Bloomberg Examary hor Dern. Surely you heard what he had to say. Are you buying it?
I mean, there is the sense that basis trade hatch funds and winding basis trade rate is some turmoil in the treasury market. But I think what treasure d Squary Bess said. He cited the take data basically, it's it's a data release provided by his own department. I think that that's only part of the picture because this data collects information from US custidium banks. So say I was a China central bank, my holdings with US custidian banks
will be will be disclosed in the Treasury data. But I can also have treasury holdings with European custidian banks in Europe, stay in Belgium with the clear and that that is not reflected in the data that the Treasury Secretary can see.
So in my mind, thinking of data, China's got about seven hundred and sixty billion dollars in US Treasury securities, three trillion dollars in US dollars held in reserve. So there's a lot of pressure here that China could apply. Right if this trade negotiation or whatever we're in right now doesn't go well. And what you point out is that the abrupt turn that President Trump made last week
essentially exposes the White House's Achilles heel. And I'm just wondering how effective the Trump administration can be in these trade negotiations with this sort of damicles kind of hanging over its head.
Exactly.
I'm not sure President Trump knows what the art of the deal is, or definitely it doesn't seem like he knows what the art of the war is. Basically, he showed the world his pain point last week, right he basically said, Okay, I'm halting the terriffs on the rest of the world because I saw the bomb market was not doing so well. Then everyone knows that's Trump's pain point.
And I think, I mean, of course, the Chinese government doesn't have strong incentives to basically fire sale and the dumb or its usual US dollars because you know, it will have to encour some losses, right, But it could tease, It could tease Trump because Besson, he is in charge of terraff negotiations and he is a self acclaimed the biggest bound salesman in the US, right, and he talks about like how much he cares about the bound market
and the bound yields. He said that the one percentage point rise in tenure will cause the US government one hundred billion dollars, so we all know that's their pain point.
So surely I'm wondering whether or not these moves and the conversations around them is really fueling talk of d dollarization and whether major central banks around the world will become even more aggressive in moving away from the dollar.
I think it's already happening. If you look at the IMF data, US dollar accounted for over seventy percent of global foreign exchange reserves twenty years ago. Now it's less than sixty percent, And especially in the last couple of years, right, Like, the US treasures have been very volatile and the total returns have not been good. So it's not just China, it's everyone else as well, trying to diversify a little bit.
One of the other topics that came up during the conversation with Treasury Secretary Besant was independence of the FED and the fact that the administration is going to be looking for a replacement for FED. Shair J. Powell when his term is up, and those conversations will happen in the fall. We've talked a little bit in the past about the possibility that the FED would face pressure from
the White House, and I'm wondering whether or not. Maybe the pressure wouldn't come in terms of adjusting the policy rate, but I'm wondering about pressure to use the balance sheet as a way of controlling what's happening in the treasury market. Do you think that's a real risk.
I think it's very much on the table. In this sense. The Treasury Department and the Federal Reserve aligned US government does not have incentives to see its boring soaring right. It's not good for the is called condition. It's also not good for the broad economy because US government bundk yield is the benchmark for everything, for blondgages, for corporate loans. So in this case, if the ten year your bikes to like say four point seven percent, I think the FED could make them move.
Well, leave it there. Surely it's always a pleasure. Thank you so much. Bloomberg opinion columnist July Wren, in her latest piece, writing why wouldn't China weaponize its treasury holdings? Surely joining us from Hong Kong here on the Daybreak Asia podcast. Welcome back to the Daybreak Asia podcast. I'm Ded Krisner. So a measure of calm seem to return to financial markets today after seven sessions of volatility. We had US equities pushing higher, with the S and P
picking up around eight ten to one percent. All but one of the S and p's eleven industry groups, Advanced Consumer Discretionary was the only decliner. Joining me now for a closer look at the price section is Ross Mayfield. He is investment strategist at Baird Ross. Thank you for joining us. So this news on trade policy has been so dynamic and it's created a lot of volatility we've seen that. Do you expect this volatility to be the new normal?
I do think so, because this policy is being rendered via executive action and not going through the kind of normal,
you know, legislative process. I think even as some of the tariff threats get pulled back and negotiations keep occurring, it's going to be hard for business leaders to ever feel a sense that they can invest for the next three to five years because a lot of these policies can be reversed back on overnight and even levied in some sort of exchange that's not really trade or economic related.
We've seen that with deportations, fentanyl, things like that. So it's really hard to have confidence, and that lack of confidence leads to volatility.
No doubt, I mean, President Trump. They flow to the possibility of temporary exemptions for auto parts. Over the weekend, there was this idea that maybe some of the tech sector could be immune at least temporarily as well. And now we're learning that the administration has started investigations on the impact of certain imports like semiconductors and pharmaceuticals on
US national security. So it's difficult to kind of identify the next potential pressure point and then as a result making adjustment and avoid that space, is it not, Yes.
Extremely so, I mean it's it's difficult for business owners. I imagine it's also difficult for investors to get a sense of how this might play out. Obviously, I think you can feel, you know, to extend, you can feel confident about anything right now, you can feel little confidence that at a minimum that Trump put is still somewhere out there. The bond market activity, you know, reversed the
worst possible outcome of this policy prescription. You know, we saw the negotiations, we've seen the ninety day pause, so I think at a minimum you can feel confident that they're some sort of tail risk downside scenario that's removed. But past that, we could go anywhere from here. And I don't think anyone should be surprised.
If there's a beneficiary or a group of beneficiaries. I think you have to look at the big banks, right, I mean today we had Goldman reporting its highest ever quarter in terms of overall trading revenue, and the story was similar for both JP, Morgan Chase, and Morgan Stanley. So to be fair, there are some bright spots right when you look at this market volatility, you got to look at the guys who are trading and generating revenue, right.
Yeah, absolutely, And the banks and financials are one of the kind of cleanest ways to lever up this new administration. Anyway, even if you didn't expect this coming, you saw a deregulatory environment coming down the pipe, potentially a ramp up in m and A and IPO activity with a more you know, typically business friendly administration. So the banks and obviously not super leveraged. Tariffs and trade either pretty pretty domestic.
I know they do some lending. So yeah, the banks and the financials look in about as good a position as you could hope for.
Let's talk a little bit more about the bond market, because we heard today from Treasury Secretary Scott Bessant, and one of the questions that we put to him was whether or not foreign holders were dumping US treasuries. He pushed back on that a bit, saying he didn't think there was any dumping. But I'm wondering whether you think the conversation around tariffs and trade tensions more broadly might cause foreign holders of US treasuries to perhaps take a
second look and maybe even lighten a position. Yeah.
Absolutely, I think I think that's part of a larger trade you've seeing here where the dollar has been down as well, maybe against expectations for a country putting on tariff. So yeah, I think at a minimum, other countries are going to want to continue to diversify you away from the dollar, if only so that they're not you know, so linked and so potentially vulnerable in negotiations with the US. You know, we've seen this big move in gold. I imagine that has a lot to do with central bank
diversification as well. So yeah, I think it's it's completely on the table.
So I'm curious about the trading strategies that you're using right now. Given everything that we're describing, what are you doing well?
When you get a big sell off, a big sharp sell off, you typically are rewarded if you go, you know, risk on as long as you can can stomach the next you know, six to twelve months, Usually your returns are strong year out. So just just generally buying the dip, but focusing on high quality companies, knowing that even in this kind of uncertain scenario, you still are in a
higher for longer rate environment. So sticking high quality and then you know, to the extent you can zooming out past the next couple of years of trade war and tariffs and thinking about you know, adding to secular winners, things in the AI space, for example, that might be rocky over the next year or two, but have that long term growth potential in a slower growth world.
So higher for longer rates. And when I hear you say that is okay, tariffs will probably be inflationary, and the Fed is going to be on guard and keep rate steady, and the idea that we're going to see multiple rate cuts this year may need to be rethought.
Is that right?
I think so. I mean, if you you know, the Fed can change your mind quickly as spots of weakness pop up, and certainly the bond market has been under pressure. But yeah, they've basically said they're worries and concerns about the inflationary impact of tariffs outweighs their concerns about growth right now, even as you know, the underlying economy is
cooling in many spots. And then you do have the pressure on the long end just from the uncertainty around this policy prescription so high for longer rate environment very different from the twenty tens, and I think that, you know, lends a credence to focusing on companies that are generating cash flow, not relying on capital markets to a large extent.
I'd like to get your take on the US consumer. Interesting today that LVMH, one of the bell weathers when it comes to the luxury industry, reported sales that were down more than expected. Obviously, we've weak demand coming out of China, maybe a little bit of surprise there. The fact that the US showed some weakness as well, did that kind of change your opinion of where the consumer is right now? A lot of times we get very concerned about the down market participation, but now we're talking
about a company that caters to the luxury sector. Yeah.
I think it's across the board. Uncertainty has kind of put a pause in consumer spending. Maybe we entered the year not with the robust consumer we'd seen in twenty twenty three and twenty four, but certainly not in a bad spot and not over levered. I think importantly, you know, debt to income ratios are largely in check. But this uncertainty that's weighing on the economy via tariffs and the potential for higher inflation, I think has really just put
a chill on things. You know, you look at some of the soft data, like consumer confidence falling to lows not seen since the financial crisis, and you can get a sense that consumers are on pause for now, similar to how businesses are acting just because of the uncertainty. So I think there not a trouble point, but certainly cooling and this policy uncertainty isn't helping.
I'm wondering whether you're looking offshore at all in the current environment, and whether or not there is still some attraction to stocks in Europe right now. I know they've been on an amazing run so far this year. Do you think Europe's got more upside?
I definitely do. I think, first and foremost, I think international diversification becomes much more important in this post trade, post packs Americana kind of world. You just have much more correlated or uncorrelated return streams from different trading blocks. The dollar perhaps not as dominant, So I think international diversification in general is going to be more important. And then on Europe, I mean they're still stimulating at a minimum.
You look at their economy and you see those fiscal promises, and you see what the aerospace and defense stocks are doing, you know, anticipation of getting to the NATO defense spend requirements, and you say, well, at least that's an economy that's stimulating. China's stimulates, So I think there's plenty of opportunity abroad, even if this trade war kind of helps no one and aggregate.
We'll leave it there, Ross, thank you so much, Always a pleasure, Ross Mayfield. There he's the investment strategist at Baird. Joining us here on the Daybreak Asia Podcast. Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the story shaping markets, finance, and geopolitics in the Asia Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere
else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Chrisner, and this is Bloomberg