Prepping slides for macro, found these interesting correlations.
First, how the strength of the dollar correlates with the Treasury 10 year yield, daily 2015-23 April 2025.
Figure 1: Nominal dollar index vs. basket of major country currencies (blue circles), and OLS fit (blue line), and observations for 4/2/2025-4/15/2025 (red circles). Source: Fed and Treasury via FRED, and author’s calculations.
In the two weeks around Liberation Day, Treasury 10 year yields rose as the dollar fell (red circles in Figure 1).
One obvious place to look for a loss in credibility is in credit ratings; however, those are notoriously sticky. I looked at credit default swap spreads, and was surprised, as I thought only in emerging market economies in crisis did I see noticeable movements — such as those since April 2, “Liberation Day”.
Source: worldgovernmentbonds.com, annotated by author.
Large movements only in the context of the US. To quote:
As of the latest update on 27 Apr 2025 13:45 GMT+0, the United States 5 Years Credit Default Swap (CDS) value stands at 52.25 basis points. This CDS value translates to an implied probability of default of 0.87%, based on a presumed recovery rate of 40%.
All I can say is, thanks Trump!
Forgive my obsession with this idea, but if market participants are using the felon-in-chief’s actions not only to predict economic outcomes, but also future felon behavior, then default swaps may reflect the risk of “Mar-El-Lago accord”. The accord, as conceived by Miran, involves actual default. During his first term, the felon did discuss default in U.S. Treasury debt as a potential policy choice.
Essentially, if he was dumb enough to do this he’s dumb enough to do that.
Another salient point, I think, is that the Fed appears to be headed toward greater politicization:
https://www.cnn.com/2025/04/18/economy/kevin-warsh-federal-reserve-chair/index.html
We don’t know what Warsh told the felon-in-chief when the felon talked to him about firing Jay Powell. We only know that Warsh is high on the felon’s list as a replacement for Powell, and that Warsh is a political hack with a background in finance.
Oh, and we also know that since being asked about firing Powell, Warsh has gone on the warpath against the Fed:
https://www.ft.com/content/1ff8ca87-3d3a-40c9-abed-a32cc795df74
But then, that’s because he’s a political hack.