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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner.

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Speaker 2: China appears to be done retaliating against President Trump's exorbitant tariffs.

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Speaker 2: Beijing has called the Trump administration's actions a joke that

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Speaker 2: it no longer considers worthy of matching. So the question

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Speaker 2: now is whether President Chijinping will find a more potent

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Speaker 2: weapon to strike back at his opponent. For a closer look, now,

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Speaker 2: I am joined by Bloomberg opinion columnist Shuley Wren her

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Speaker 2: latest column titled why wouldn't China weaponize its treasury holdings?

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Speaker 2: Shuley joins us from Hong Kong. It's always a pleasure

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Speaker 2: in this piece. Shuley, you remind us that last Friday

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Speaker 2: in Beijing, leadership essentially reiterated its vow to fight to

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Speaker 2: the end, and might not this fighting include selling US treasuries?

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Speaker 3: That's the worry. So last week we saw a pretty

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Speaker 3: big treasury bound route right and with a treasury ten

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Speaker 3: year yi old up by fifty basis points, and some

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Speaker 3: of the sharpest bikes occurred during the Asia hours, leading

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Speaker 3: to speculations that you know, maybe some Asian central banks

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Speaker 3: on the move, and the japan has come out saying

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Speaker 3: that they were not weaponize their treasury holdings, and by

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Speaker 3: the Treasury Department's data, they're the biggest foreign creditor, but

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Speaker 3: China is next, So there are worries that China is

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Speaker 3: going to create a little bit of a chaos to

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Speaker 3: the US government bomb market.

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Speaker 2: So on Monday, we caught up with Treasury Secretary Scott

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Speaker 2: Bessant during a trip to Buenos Aires and we asked

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Speaker 2: him whether foreign holders were dumping US treasuries. Here's what

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Speaker 2: he had to say.

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Speaker 4: I don't think there's a dumping, and I think we

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Speaker 4: saw in the TIC data either today or Friday that

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Speaker 4: actually foreign ownerships picked up. We had two we had

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Speaker 4: three big auctions last week, and on the longer in

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Speaker 4: auction ten year, thirty year, we saw increase foreign competition.

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Speaker 4: So I actually think this is one of those occasional

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Speaker 4: var shocks that you get in the trading community. I

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Speaker 4: think a lot of people got very leverage, maybe out

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Speaker 4: over their skis, and then you combine that with some

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Speaker 4: real money selling and you get these moves.

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Speaker 5: So you don't think it's sovereigns potentially it's hedge funds unwinding.

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Speaker 5: I have no.

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Speaker 4: Evidence that it's sovereigns and look Emory the not you.

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Speaker 4: But the nature of journalism is to create a headline

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Speaker 4: that ten days ago when tenure yields hit three ninety said, well,

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Speaker 4: Secretary Besson got what he wanted, he got ten years

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Speaker 4: yields down. But it's the wrong reason. Now I figet

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Speaker 4: what they hit on Friday, maybe for forty something.

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Speaker 5: We saw a fifty basis move last week and ten

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Speaker 5: year yield at the same time that the dollar was

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Speaker 5: weakening nearly three percent. How do you simultaneously look at

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Speaker 5: that situation. It feels like investors are dumping US assets.

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Speaker 4: Well, look, I've learned that not to look at what

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Speaker 4: happens over a week. I, for better or worse, have

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Speaker 4: lived through a lot of these things in trading. In

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Speaker 4: one's personal trading history is the scar tissue that sticks

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Speaker 4: with you the most. I can tell you exactly where

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Speaker 4: I was standing in nineteen ninety eight when the long

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Speaker 4: term capital the backle happened. That had nothing to do

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Speaker 4: with anything other than a bunch of geniuses up in

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Speaker 4: Greenwich who had too much leverage.

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Speaker 2: Treasury Secretary Scott Besson during his trip to Buenos Aires

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Speaker 2: speaking to Bloomberg Examary hor Dern. Surely you heard what

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Speaker 2: he had to say. Are you buying it?

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Speaker 3: I mean, there is the sense that basis trade hatch

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Speaker 3: funds and winding basis trade rate is some turmoil in

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Speaker 3: the treasury market. But I think what treasure d Squary

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Speaker 3: Bess said. He cited the take data basically, it's it's

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Speaker 3: a data release provided by his own department. I think

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Speaker 3: that that's only part of the picture because this data

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Speaker 3: collects information from US custidium banks. So say I was

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Speaker 3: a China central bank, my holdings with US custidian banks

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Speaker 3: will be will be disclosed in the Treasury data. But

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Speaker 3: I can also have treasury holdings with European custidian banks

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Speaker 3: in Europe, stay in Belgium with the clear and that

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Speaker 3: that is not reflected in the data that the Treasury

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Speaker 3: Secretary can see.

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Speaker 2: So in my mind, thinking of data, China's got about

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Speaker 2: seven hundred and sixty billion dollars in US Treasury securities,

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Speaker 2: three trillion dollars in US dollars held in reserve. So

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Speaker 2: there's a lot of pressure here that China could apply.

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Speaker 2: Right if this trade negotiation or whatever we're in right

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Speaker 2: now doesn't go well. And what you point out is

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Speaker 2: that the abrupt turn that President Trump made last week

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Speaker 2: essentially exposes the White House's Achilles heel. And I'm just

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Speaker 2: wondering how effective the Trump administration can be in these

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Speaker 2: trade negotiations with this sort of damicles kind of hanging

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Speaker 2: over its head.

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Speaker 4: Exactly.

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Speaker 3: I'm not sure President Trump knows what the art of

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Speaker 3: the deal is, or definitely it doesn't seem like he

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Speaker 3: knows what the art of the war is. Basically, he

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Speaker 3: showed the world his pain point last week, right he

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Speaker 3: basically said, Okay, I'm halting the terriffs on the rest

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Speaker 3: of the world because I saw the bomb market was

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Speaker 3: not doing so well. Then everyone knows that's Trump's pain point.

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Speaker 3: And I think, I mean, of course, the Chinese government

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Speaker 3: doesn't have strong incentives to basically fire sale and the

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Speaker 3: dumb or its usual US dollars because you know, it

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Speaker 3: will have to encour some losses, right, But it could tease,

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Speaker 3: It could tease Trump because Besson, he is in charge

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Speaker 3: of terraff negotiations and he is a self acclaimed the

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Speaker 3: biggest bound salesman in the US, right, and he talks

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Speaker 3: about like how much he cares about the bound market

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Speaker 3: and the bound yields. He said that the one percentage

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Speaker 3: point rise in tenure will cause the US government one

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Speaker 3: hundred billion dollars, so we all know that's their pain point.

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Speaker 2: So surely I'm wondering whether or not these moves and

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Speaker 2: the conversations around them is really fueling talk of d

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Speaker 2: dollarization and whether major central banks around the world will

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Speaker 2: become even more aggressive in moving away from the dollar.

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Speaker 3: I think it's already happening. If you look at the

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Speaker 3: IMF data, US dollar accounted for over seventy percent of

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Speaker 3: global foreign exchange reserves twenty years ago. Now it's less

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Speaker 3: than sixty percent, And especially in the last couple of years, right, Like,

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Speaker 3: the US treasures have been very volatile and the total

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Speaker 3: returns have not been good. So it's not just China,

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Speaker 3: it's everyone else as well, trying to diversify a little bit.

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Speaker 2: One of the other topics that came up during the

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Speaker 2: conversation with Treasury Secretary Besant was independence of the FED

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Speaker 2: and the fact that the administration is going to be

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Speaker 2: looking for a replacement for FED. Shair J. Powell when

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Speaker 2: his term is up, and those conversations will happen in

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Speaker 2: the fall. We've talked a little bit in the past

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Speaker 2: about the possibility that the FED would face pressure from

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Speaker 2: the White House, and I'm wondering whether or not. Maybe

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Speaker 2: the pressure wouldn't come in terms of adjusting the policy rate,

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Speaker 2: but I'm wondering about pressure to use the balance sheet

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Speaker 2: as a way of controlling what's happening in the treasury market.

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Speaker 2: Do you think that's a real risk.

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Speaker 3: I think it's very much on the table. In this sense.

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Speaker 3: The Treasury Department and the Federal Reserve aligned US government

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Speaker 3: does not have incentives to see its boring soaring right.

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Speaker 3: It's not good for the is called condition. It's also

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Speaker 3: not good for the broad economy because US government bundk

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Speaker 3: yield is the benchmark for everything, for blondgages, for corporate loans.

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Speaker 3: So in this case, if the ten year your bikes

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Speaker 3: to like say four point seven percent, I think the

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Speaker 3: FED could make them move.

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Speaker 2: Well, leave it there. Surely it's always a pleasure. Thank

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Speaker 2: you so much. Bloomberg opinion columnist July Wren, in her

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Speaker 2: latest piece, writing why wouldn't China weaponize its treasury holdings?

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Speaker 2: Surely joining us from Hong Kong here on the Daybreak

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Speaker 2: Asia podcast. Welcome back to the Daybreak Asia podcast. I'm

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Speaker 2: Ded Krisner. So a measure of calm seem to return

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Speaker 2: to financial markets today after seven sessions of volatility. We

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Speaker 2: had US equities pushing higher, with the S and P

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Speaker 2: picking up around eight ten to one percent. All but

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Speaker 2: one of the S and p's eleven industry groups, Advanced

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Speaker 2: Consumer Discretionary was the only decliner. Joining me now for

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Speaker 2: a closer look at the price section is Ross Mayfield.

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Speaker 2: He is investment strategist at Baird Ross. Thank you for

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Speaker 2: joining us. So this news on trade policy has been

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Speaker 2: so dynamic and it's created a lot of volatility we've

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Speaker 2: seen that. Do you expect this volatility to be the

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Speaker 2: new normal?

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Speaker 1: I do think so, because this policy is being rendered

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Speaker 1: via executive action and not going through the kind of normal,

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Speaker 1: you know, legislative process. I think even as some of

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Speaker 1: the tariff threats get pulled back and negotiations keep occurring,

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Speaker 1: it's going to be hard for business leaders to ever

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Speaker 1: feel a sense that they can invest for the next

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Speaker 1: three to five years because a lot of these policies

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Speaker 1: can be reversed back on overnight and even levied in

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Speaker 1: some sort of exchange that's not really trade or economic related.

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Speaker 1: We've seen that with deportations, fentanyl, things like that. So

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Speaker 1: it's really hard to have confidence, and that lack of

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Speaker 1: confidence leads to volatility.

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Speaker 2: No doubt, I mean, President Trump. They flow to the

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Speaker 2: possibility of temporary exemptions for auto parts. Over the weekend,

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Speaker 2: there was this idea that maybe some of the tech

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Speaker 2: sector could be immune at least temporarily as well. And

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Speaker 2: now we're learning that the administration has started investigations on

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Speaker 2: the impact of certain imports like semiconductors and pharmaceuticals on

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Speaker 2: US national security. So it's difficult to kind of identify

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Speaker 2: the next potential pressure point and then as a result

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Speaker 2: making adjustment and avoid that space, is it not, Yes.

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Speaker 1: Extremely so, I mean it's it's difficult for business owners.

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Speaker 1: I imagine it's also difficult for investors to get a

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Speaker 1: sense of how this might play out. Obviously, I think

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Speaker 1: you can feel, you know, to extend, you can feel

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Speaker 1: confident about anything right now, you can feel little confidence

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Speaker 1: that at a minimum that Trump put is still somewhere

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Speaker 1: out there. The bond market activity, you know, reversed the

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Speaker 1: worst possible outcome of this policy prescription. You know, we

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Speaker 1: saw the negotiations, we've seen the ninety day pause, so

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Speaker 1: I think at a minimum you can feel confident that

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Speaker 1: they're some sort of tail risk downside scenario that's removed.

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Speaker 1: But past that, we could go anywhere from here. And

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Speaker 1: I don't think anyone should be surprised.

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Speaker 2: If there's a beneficiary or a group of beneficiaries. I

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Speaker 2: think you have to look at the big banks, right,

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Speaker 2: I mean today we had Goldman reporting its highest ever

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Speaker 2: quarter in terms of overall trading revenue, and the story

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Speaker 2: was similar for both JP, Morgan Chase, and Morgan Stanley.

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Speaker 2: So to be fair, there are some bright spots right

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Speaker 2: when you look at this market volatility, you got to

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Speaker 2: look at the guys who are trading and generating revenue, right.

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Speaker 1: Yeah, absolutely, And the banks and financials are one of

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Speaker 1: the kind of cleanest ways to lever up this new administration. Anyway,

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Speaker 1: even if you didn't expect this coming, you saw a

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Speaker 1: deregulatory environment coming down the pipe, potentially a ramp up

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Speaker 1: in m and A and IPO activity with a more

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Speaker 1: you know, typically business friendly administration. So the banks and

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Speaker 1: obviously not super leveraged. Tariffs and trade either pretty pretty domestic.

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Speaker 1: I know they do some lending. So yeah, the banks

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Speaker 1: and the financials look in about as good a position

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Speaker 1: as you could hope for.

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Speaker 2: Let's talk a little bit more about the bond market,

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Speaker 2: because we heard today from Treasury Secretary Scott Bessant, and

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Speaker 2: one of the questions that we put to him was

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Speaker 2: whether or not foreign holders were dumping US treasuries. He

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Speaker 2: pushed back on that a bit, saying he didn't think

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Speaker 2: there was any dumping. But I'm wondering whether you think

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Speaker 2: the conversation around tariffs and trade tensions more broadly might

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Speaker 2: cause foreign holders of US treasuries to perhaps take a

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Speaker 2: second look and maybe even lighten a position. Yeah.

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Speaker 1: Absolutely, I think I think that's part of a larger

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Speaker 1: trade you've seeing here where the dollar has been down

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Speaker 1: as well, maybe against expectations for a country putting on tariff.

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Speaker 1: So yeah, I think at a minimum, other countries are

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Speaker 1: going to want to continue to diversify you away from

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Speaker 1: the dollar, if only so that they're not you know,

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Speaker 1: so linked and so potentially vulnerable in negotiations with the US.

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Speaker 1: You know, we've seen this big move in gold. I

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Speaker 1: imagine that has a lot to do with central bank

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Speaker 1: diversification as well. So yeah, I think it's it's completely

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Speaker 1: on the table.

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Speaker 2: So I'm curious about the trading strategies that you're using

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Speaker 2: right now. Given everything that we're describing, what are you

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Speaker 2: doing well?

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Speaker 1: When you get a big sell off, a big sharp

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Speaker 1: sell off, you typically are rewarded if you go, you know,

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Speaker 1: risk on as long as you can can stomach the

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Speaker 1: next you know, six to twelve months, Usually your returns

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Speaker 1: are strong year out. So just just generally buying the dip,

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Speaker 1: but focusing on high quality companies, knowing that even in

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Speaker 1: this kind of uncertain scenario, you still are in a

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Speaker 1: higher for longer rate environment. So sticking high quality and

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Speaker 1: then you know, to the extent you can zooming out

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Speaker 1: past the next couple of years of trade war and

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Speaker 1: tariffs and thinking about you know, adding to secular winners,

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Speaker 1: things in the AI space, for example, that might be

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Speaker 1: rocky over the next year or two, but have that

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Speaker 1: long term growth potential in a slower growth world.

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Speaker 2: So higher for longer rates. And when I hear you

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Speaker 2: say that is okay, tariffs will probably be inflationary, and

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Speaker 2: the Fed is going to be on guard and keep

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Speaker 2: rate steady, and the idea that we're going to see

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Speaker 2: multiple rate cuts this year may need to be rethought.

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Speaker 4: Is that right?

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Speaker 1: I think so. I mean, if you you know, the

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Speaker 1: Fed can change your mind quickly as spots of weakness

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Speaker 1: pop up, and certainly the bond market has been under pressure.

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Speaker 1: But yeah, they've basically said they're worries and concerns about

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Speaker 1: the inflationary impact of tariffs outweighs their concerns about growth

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Speaker 1: right now, even as you know, the underlying economy is

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Speaker 1: cooling in many spots. And then you do have the

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Speaker 1: pressure on the long end just from the uncertainty around

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Speaker 1: this policy prescription so high for longer rate environment very

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Speaker 1: different from the twenty tens, and I think that, you know,

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Speaker 1: lends a credence to focusing on companies that are generating

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Speaker 1: cash flow, not relying on capital markets to a large extent.

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Speaker 2: I'd like to get your take on the US consumer.

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Speaker 2: Interesting today that LVMH, one of the bell weathers when

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Speaker 2: it comes to the luxury industry, reported sales that were

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Speaker 2: down more than expected. Obviously, we've weak demand coming out

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Speaker 2: of China, maybe a little bit of surprise there. The

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Speaker 2: fact that the US showed some weakness as well, did

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Speaker 2: that kind of change your opinion of where the consumer

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Speaker 2: is right now? A lot of times we get very

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Speaker 2: concerned about the down market participation, but now we're talking

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Speaker 2: about a company that caters to the luxury sector. Yeah.

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Speaker 1: I think it's across the board. Uncertainty has kind of

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Speaker 1: put a pause in consumer spending. Maybe we entered the

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Speaker 1: year not with the robust consumer we'd seen in twenty

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Speaker 1: twenty three and twenty four, but certainly not in a

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Speaker 1: bad spot and not over levered. I think importantly, you know,

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Speaker 1: debt to income ratios are largely in check. But this

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Speaker 1: uncertainty that's weighing on the economy via tariffs and the

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Speaker 1: potential for higher inflation, I think has really just put

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Speaker 1: a chill on things. You know, you look at some

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Speaker 1: of the soft data, like consumer confidence falling to lows

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Speaker 1: not seen since the financial crisis, and you can get

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Speaker 1: a sense that consumers are on pause for now, similar

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Speaker 1: to how businesses are acting just because of the uncertainty.

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Speaker 1: So I think there not a trouble point, but certainly

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Speaker 1: cooling and this policy uncertainty isn't helping.

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Speaker 2: I'm wondering whether you're looking offshore at all in the

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Speaker 2: current environment, and whether or not there is still some

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Speaker 2: attraction to stocks in Europe right now. I know they've

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Speaker 2: been on an amazing run so far this year. Do

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Speaker 2: you think Europe's got more upside?

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Speaker 1: I definitely do. I think, first and foremost, I think

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Speaker 1: international diversification becomes much more important in this post trade,

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Speaker 1: post packs Americana kind of world. You just have much

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Speaker 1: more correlated or uncorrelated return streams from different trading blocks.

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Speaker 1: The dollar perhaps not as dominant, So I think international

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Speaker 1: diversification in general is going to be more important. And

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Speaker 1: then on Europe, I mean they're still stimulating at a minimum.

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Speaker 1: You look at their economy and you see those fiscal promises,

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Speaker 1: and you see what the aerospace and defense stocks are doing,

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Speaker 1: you know, anticipation of getting to the NATO defense spend requirements,

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Speaker 1: and you say, well, at least that's an economy that's stimulating.

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Speaker 1: China's stimulates, So I think there's plenty of opportunity abroad,

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Speaker 1: even if this trade war kind of helps no one

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Speaker 1: and aggregate.

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Speaker 2: We'll leave it there, Ross, thank you so much, Always

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Speaker 2: a pleasure, Ross Mayfield. There he's the investment strategist at Baird.

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Speaker 2: Joining us here on the Daybreak Asia Podcast. Thanks for

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Speaker 2: listening to today's episode of the Bloomberg Daybreak Asia Edition podcast.

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Speaker 2: Each weekday, we look at the story shaping markets, finance,

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Speaker 2: and geopolitics in the Asia Pacific. You can find us

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Speaker 2: on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere

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Speaker 2: else you listen. Join us again tomorrow for insight on

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Speaker 2: the market moves from Hong Kong to Singapore and Australia.

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Speaker 2: I'm Doug Chrisner, and this is Bloomberg