Blain’s Morning Porridge March 27^th 2025: Mar-a-Lago and Liability Management

“Leave the gun, take the cannoli.”

The yield on Sovereign Bonds is the “risk-free” rate from which relative risk in any economy is priced. There is a crisis across all developed nations in the quantum of debt they now face servicing in a global economy where risks are rising and there is a significant threat of stagflation. It’s time for nations to get aggressive about Liability Management of their outstanding debt.

Lots of readers of the Morning Porridge say I am overly bearish… as I’ve said before “Scotsmen are seldom mistaken for a ray of sunshine.” I am afraid this morning I might sound particularly sour… I think it’s time to shake one of the foundation stones of modern finance – Sovereign Debt.

Most of the folk I’ve spoken with recently reckon the US stock market remains on course for a downer year. They agree the negative effect of tariffs, increasing anti-American sentiment, and Europe’s need to build new geopolitical relationships, will seriously impact the value of US stocks in terms of US firms’ global sales, profitability, the American-exceptionalism premium, and that there is a diversification need to trade away from US investments into other jurisdictions.  Heck, even Americans I spoke to yesterday agreed with that analysis.. I am going to spend some time in next few weeks looking at diversification trades into other economies, including Europe and Asia.

Where most folk differ from my outlook is US Treasuries and other Sovereign Bonds.

Most people take a very conventional perspective on bonds – if the US economy slows, and employment ticks up, then the Fed will ease and its upside for the bond market. Buyers will therefore pile into US bonds as the risks of a US recession rise. The US Treasury market (and gold) are the ultimate safe-haven assets in time of recession and crisis.

Maybe not so I say. What if…. US Treasuries no longer merit true safe haven status.

WOW… In the world of financial commentary you simply can’t say that. It’s like denying the existence of Gold God. It’s the equivalent of Martin Luther (the great Protestant Reformer) pinning 95 thesis to the gates of US Treasury Building explaining why the US bond market is finished…

But… the thing is… maybe it’s true.

The biggest concern for all Western economies today is the scale of the debt they must service, and how they must cut government spending to rein in that debt from exploding just to service rising rates! UK Chancellor Rachel Reeves discovered it as she prepped for her Statement on the National Finances yesterday; there is absolutely no wriggle room but to cut spending, no matter how unpopular it makes her.

Governments around the globe are struggling with debt – they need to think differently and outside the box, and adopt more aggressive strategies to spending, taxation and managing their debt, embracing liability management. For instance, in the UK there is a discussion/argument underway about reducing the average maturity of debt to cut the interest servicing cost.

Let’s just review conventional bond wisdom:

The defining feature of US Treasury bonds, and any other Sovereign Bond; UK Gilts, German Bunds or Japanese JGBs, is the very strong expectation investors will be repaid interest and principal as the bond matures. The price a buyer is prepared to pay largely reflects your expectation of inflation during the life of the bond. There is an element of credit risk associated with high-grade sovereigns, but its small. High grade nations don’t go bust and don’t default – the nations that do default tend to be those lower down the ladder that have unwisely borrowed in currencies they don’t control.

The risk on High Grade Sovereign Bonds is perceived to be small because Financially Sovereign Governments have the power to print money to pay interest and principal. (Actually, that’s a problem for the Germans as they have to ask the committee that is the EU/ECB to agree to print more money, whereas in the UK, USA and Japan there is a little green button and a tap under the Central Bank’s Governor’s desk marked “Money Spigot” which starts the presses rolling. He then turns the tap to speed up or slow the printers. I jest…. or do I?)

The effects of money printing are significant – monetarists will always argue that increasing the money supply always leads to inflation. From 2008 to 2020, as Central Banks flooded the ailing global economy with QE money and absurdly low interest rates, there was curiously little inflation in the real world. Monetary inflation was balanced by China exporting deflation in the form of cheaper and cheaper prices for all kinds of manufactured goods, but also by QE money not being invested into real-economy good and services, but into notional financial assets (bonds, stocks and shares).

The spectacular rally in shares from 2009 onwards was actually massive inflation in financial assets which markets classify as a rally rather than mispriced risk fuelled by easy money. I would argue that inflationary overpricing in the value of financial assets has still not been unwound. It’s very apparent in the high values still ascribed to highly speculative assets like Tesla or Bitcoin. (Full disclosure, and for clarity – I am short of both.) Easy money fuelled speculation in high-risk stocks and alternative instruments – spawning crypto-currencies and such spurious investment notions as SPACs and NFTs. (Call me if you don’t recall what they were.)

Let’s return to the US Treasury Market.

In the short-term I am sure US bonds will rally as recession bites and the Fed eases – but longer-term… what if buyers don’t show up? Personally I don’t believe in bond vigilantes, but I do believe global buyers may move away from dollar bonds for a host of Trump related reasons.

There is a rumour Donald Trump is going to make other global leaders an offer they can’t refuse. His solution to the huge US deficit is he’s going to launch the ultimate protection racket – The Mar-a-lago Accord. The USA will “protect” any nation in return for that nation accepting/buying a 100-year Zero-Coupon Century Bond in return for exchanging the higher interest/shorter dated Treasuries they already have. At a stroke the USA will slash interest costs. Trump also wants his “guests” to move production facilities to the USA and accept a lower dollar to boost the US economy.

(Could this be true? It does sound a bit Conspiracy Theory. I make no judgement on the veracity of rumour, but there is a joke/story going round the US market that it’s not just US National Security Advisor Mike Waltz who accidently includes hostile journalists in Message App chains. Apparently, US Treasury Sec Scott Bessent has been asking his besties on Wall Street how to do it – and they leak like sieves.)

Whatever the rumoured Mar-a-Lago accord is, it sounds like a piece of imaginative Liability Management of US debt. The upside for Trump’s transactional America is that a zero-coupon US Century bonds would fund a portion of the budget deficit for free for 100-years, but which time inflation would have eaten away most of the value of the debt. If inflation remains a modest 2.5% per annum, then the bond’s real purchasing power will be less than 10% of what it could buy today when it matures!

Clearly that’s not a great investment. However, lest we forget, the Austrians sold a Zero-Coupon 100-year bond during the Covid Pandemic at a yield of 0.09%. It was heavily oversubscribed and traded as high as €140 as rates fell to -0.5%! As ECB rates rose on Ukraine triggered inflation, the price collapsed as low as €33. It now trades around €42. The lesson from the Austria bond is how swiftly bonds reprice to reflect changing inflationary expectations.

In Trump’s American tariff nightmare inflation is likely to return to volatilities last seen in the 1970s and 80’s, which caused interest rates to spike well into double digits on multiple occasions. The effect on many investors contemplating US Treasury investments will be – why take the risk? I expect the US Century Bonds would be traded at pennies to the dollar in a very short-time, creating a high risk perception around US credit. (In the 1990s much shorter-dated Russian bonds traded as low as 2% and still came good in the end… but it’s a trade for the brave and courageous.)

The thing is.. Trump might be on to something with the Century Bond plan – the need for heavily indebted high-grade Nations to engage in Liability Management. I’ve written many times how the UK and US could both use “Zonk Theory” to write off bonds held by the Bank of England and Fed to reduce their outstanding debt using the equivalent of zero-coupon perpetual bonds. Or, maybe it is time for the EU to launch a short-terms bill market to support Euro global trading?

The need to control National Debt before it controls us is critical… I look forward to readers proposing other solutions in the Liability Management arena.

Out of time and back to the day job…

Bill Blain

Author the Morning Porridge

Founder Windshift Capital

Partner Shard Capital