Taking Stock of China Meeting, Treasuries and Energy
It seems that lately every meeting with China follows with this scenario. Also, my take on the TLT and LQD funds.
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Let’s take a look at that much-hyped summit between Pres. Donald Trump and China’s Pres. Xi Jinping, Treasuries and energy and rare earth minerals.
We’ll start with China.
According to a Truth Social Post, Pres. Trump and Xi have decided to rename Artificial Intelligence to “Super Intelligence.” What’s the point? This seems useless, but it underscores how little came out of this meeting.
Xi also pressed the president hard (according to reporting) to shift the U.S. stance on Taiwan from “not supporting” to “being against” independence; the U.S. hasn’t agreed to it.
We can assume that at the end of the day, Xi will return home and put his foot on the gas to develop better chips, and better models (using distillation if need be). In addition, China will also push for the energy to drive that compute, but on that front, they seem to be ahead of the U.S. where braggawatts remains a concern.
My take? Since last year in Geneva, I think the simplest way to frame every meeting with China so far is that afterward, the leadership goes back to their respective countries, and each side has one specific agenda: The U.S. must continue to maintain or increase its lead in compute, while working on being less dependent on China in sectors where we need to be truly resilient: processing, refining, and smelting rare earths, critical minerals, and even basic commodities is a part of that plan.
China, meanwhile, needs to grow its compute and chip industry (in terms of size and quality) faster than the U.S. can catch up on things that the U.S. is currently over-reliant on China for.
Both sides have improved their hands (or cards) since the Geneva meetings, but my nagging concern is that China is more fixated on its goal and better organized in achieving it, hence my repeated concerns for markets and national security, on cheap Chinese compute.
The House Doesn’t Always Win
Treasury Sec. Scott Bessent is struggling as the 10-year Treasury yields jumped to 5.2% this week. A 20 basis point move. The part of the move that seemed to be triggered by S&P PMI data seemed particularly unusual (it is rarely such a market moving event). Maybe that is why he has tapped Dave Zervos to act as a special adviser? That should be interesting – he likes to think “out of the box.” Odds of revaluing gold at current market prices (at least) has just increased, is first takeaway I’m hearing.
On bond yields, the data isn’t helping him. The war isn’t helping him. At the same time, the supply (just not in size but in average maturity) from the corporate market isn’t helping him. Neither are bond yields that are higher globally than they have been in a long time. Treasuries just aren’t that exciting, which is one of the messages the 5-year bond auction seemed to send.
The buybacks left a lot to be desired. The Treasury continues to only help buy back some illiquid bonds, even then only at yields in the context of the market.
Some “don’t bet against the Fed (or Treasury)” positioning was likely wiped out this week on that move, meaning it should be more difficult to push yields higher. But to get yields much lower, we need peace in either Russia/Ukraine or the Middle East (which we didn’t seem to get) or something akin to the “whatever it takes” moment Draghi unleashed on the Euro.
Bottom Line
It’s difficult to be bearish rates after the big moves. Even on oil and diesel and the wars, the “surprise” would seem to be a solution rather than ongoing problems (though by no means have markets priced in bad cases, let alone worst cases, for global energy distillate supplies). Let’s call rates “neutral” here, maybe playing for a bounce in prices (lower yields).
The long-dated Treasury exchange-traded fund ($TLT) dropped 2.4% on the week, while the long-dated investment grade ETF ($LQD) dropped only 1.4%. Some of the reason for that is linked to a shorter duration, but I continue to want to combine my credit risk with my duration risk and own longer-dated corporate bonds, with an emphasis on the compute build bonds (which make up a large part of the end of the curve anyways). Any slowdown in compute build (which was off the table this week) will be incredibly good for all-in compute bond yields. I don’t own either TLT or LQD, but I am adding to closed end municipal bond funds though at these higher yields and larger discounts to net asset value.
Energy, energy, and more energy. While rare earths and critical minerals (especially the processed and refined versions) are important, they don’t resonate with the public the way higher energy prices do (or god forbid, actual shortages). What the public wants, the public often gets, so continue to be skewed heavily to energy and energy production in all forms (electricity, liquefied natural gas, and diesel are at the top of your investing list). Yes, the sector will sell off on any resolution of today’s oil price problems, so be careful there (plenty of profits to be taken already), but look to reload on any selloff. If Canada and Australia can start addressing their self-inflicted energy wounds, and Europe can at least admit they might have a problem, there is a lot more opportunity in this space.
Good luck and I cannot help but feel a bit disappointed that this week’s opportunity in the U.S. didn’t seem to create much real momentum that markets or the economy could latch on to.
Finally, please check out a preview we did on CNBC. Also, I ended the week on Bloomberg TV where we spoke about Trump’s military options on Iran post midterms and what I thought were very good words (for markets) from the NATO Secretary. I’ve also included a link to Academy’s latest Around the World Podcast (Academy Podcasts, iTunes, and you can also find on Spotify) I highly recommend.
At the time of publication, Tchir had no position in any security mentioned.
