Treasury Auction Ticks off Market Jitters

I’ve been working on a piece that began as a concise analysis of the economy, which I had expected to send out earlier this week. As I write that sentence, I see why I might be a bit behind - I’m always overly optimistic about how much I can cram into the fewest words.

Anyhoo, the deeper I dove, the more interesting it got, so that’ll be out tomorrow for those who are looking for a tantalizing beach read over the long weekend. Am I selling it well? In the interim, here’s a look at the week so far.

On Wednesday, the markets were sitting at session highs by 1 pm EST, then took a nosedive, falling more than 1% in around 30 minutes. Based on timing, the cause of the decline in both equities and bonds came from either the brutal tongue-lashing President Trump gave South African President Cyril Ramaphosa over claims of “white genocide” or the weak 20-year bond auction, which led to the yield on 10-year T-note jumping +11 basis points to nearly 4.6%.

So far, there is no indication of a rebound today for US markets, and European markets are down by -0.8% as of midday there. Asia experienced a rare broadly-based day in the red, and the bond markets appear to be still spooked, especially in Japan, where 10-year JGB yields have risen an additional +5 basis points to 1.56%, while the DXY dollar index is down a bit once again, on track for the 9th consecutive decline.

Back to what may have caused the sudden drop in the markets.

The scene on Wednesday between President Trump and Ramaphosa, complete with video demonstration, was reminiscent of the lambasting of Ukrainian President Volodomyr Zelensky received earlier this year in the Oval Office from Vice President Vance. Given the relative global attention on South Africa versus Ukraine, it is unlikely that this was the main driver, which leaves the weak 20-year auction as the catalyst.

Yesterday’s auction for the new 20-year was weaker than expected, clearing at a yield 1.2 basis points higher than where the “when-issued” security was trading into the auction. Typically, Treasury auctions don’t usually elicit so much attention, but we are in “interesting times.” The 7-year doesn’t warrant much attention either, but it was a horrible auction in this yawn-worthy maturity that kicked off the 2022-2023 bear market in bonds. Aside from the “tail” and the bid-to-cover ratio for yesterday’s auction, which were stronger than the very weak sales in November and December, the sale was much weaker than typical, leading to the third-worst equity market reaction to a Treasury auction ever.

As for what held up in the equity markets, it was those stocks having historically low volatility, high quality, and high momentum that outperformed those with the lowest ratings on those attributes on Wednesday. Big companies outperformed those with smaller market caps, as the small-cap Russell 2000 lost 2.8%, its worst performance since April 10.

The US Dollar Index (DXY) resumed its downward trend, falling for the past eight trading days, as of Wednesday’s close.

While stocks, bonds, and the US dollar all declined, bitcoin made a new all-time high. Its initial post-election move higher offers a perfect example of a cup-and-handle breakout. The sell-off that started in late January found support just above that breakout level.

On Monday, the Conference Board released its leading indicator index data for April, which saw a significant drop of 1% (the largest since March 2023), driven primarily by consumer expectations for business conditions following the S&P 500’s decline early in the month. The low level of building permits, lower average weekly hours worked in the manufacturing sectors, and weakness in the ISM’s New Order index also played a part, leaving the ratio of the leading indicator index versus the coincident indicator index near all-time lows (hat tip to Bespoke Investment Group for the chart). Despite the six-month growth rate of the LEI falling deeper into negative territory, it did not fall enough to trigger the recession signal.

As you can see in the chart, we are currently in the most significant drop in history, and a decline of such magnitude has typically been an indicator of an imminent recession. This time around has been different, but the jury is out on whether what we are experiencing is merely a delay of the inevitable, driven by the enormous amounts of cash pumped into the economy during the pandemic, which pushed US debt levels to record-breaking highs. I'll dive into that question tomorrow.

Tomorrow’s piece walks through what I see going on in the economy, so for today, I’ll leave you with a bit of heaven in a bottle. Last weekend, the weather on Lake Como was utterly spectacular, so we enjoyed a gorgeous lunch in Piazza Volta, which I highly recommend if you ever visit. There we enjoyed this bit of magic, which is one of the many bottles that make it impossible for me ever to give up wine. I swear I savoured every single sip.

This wine is named after a volcanic erratic boulder that has fueled many legends in the region for centuries, and is made from 100% Sangiovese Grosso grapes. Sitting in the glass, it has a vivid ruby/violet color, not quite reaching that deep, dark red that nicely aged wines get, which always makes me think of some sort of saucy vampire banquet. Don’t judge me.

On the nose, it hints at cherry and blackberry, with a hint of black pepper amidst earthier notes. It is full-bodied, but without any of the rougher tannins you can get from a big Napa Cab. I’ve read that it has an ageing potential of 15-20 years, and this bottle certainly gave no hints at all that it was nearing the rollover time.

I don’t know about you, but I find those aging recommendations are usually conservative, but then again, I don’t mind a wine that’s a bit past its peak. That’s not to be confused with corked, which is an entirely other, sometimes heartbreaking thing. When wines pass their peak, they take on a thinner appearance, resembling a dark, rusty liquid. On the palate, they are akin to stepping into an elevator a few minutes after someone who smells utterly delicious has stepped out. You know that had you been there at the right time, your nose would have been in heaven, but the echo still delivers a delight to the senses.

It is a rich wine that can hold up with a juicy steak, but I wouldn’t recommend pushing it to a spicy BBQ. You’d lose too much of the gentle richness. Leave that kind of culinary fireworks to a big Zinfandel or the like.

I suggest pouring a bit of something like this whilst you read tomorrow’s bit on what I see going on in the economy. Spoiler alert, I’m on board with Dimon.

“There’s an extraordinary amount of complacency. That’s my own view.” Jamie Dimon May 19, 2025