Reflections: The Market’s Not Panicking—But the Bond Market Is

Swap spreads just hit record lows. Hedge funds are unwinding. China’s selling. And the Fed is watching. Closely.

One of the simplest ways to spot market stress doesn’t come from headlines—it comes from swap spreads.

They’re just the difference between the interest rate banks charge each other (SOFR swaps) and the rate the U.S. government pays to borrow (Treasuries). When that difference collapses—like it just did—it means something’s breaking.

• In 2008, swap spreads collapsed before Lehman. It was a signal that banks didn’t trust each other. Liquidity froze.

• In March 2020, they collapsed again—not because of stock volatility, but because Treasury markets stopped functioning. The Fed stepped in with emergency repo ops to keep things from cracking wide open.

• Even in late 2018, spreads widened for the wrong reasons. Powell had to pivot. Not for stocks. For credit.

This week, the 30-year swap spread hit its lowest level in history. Translation? Dealers are under stress, and liquidity in the bond market is drying up. That’s bad news

Chart from Kevin Muir from The Macro Tourist

Here’s the real story:

• Pension funds and asset managers use swaps to lock in interest rates while keeping cash free to invest elsewhere—like private equity.

• Banks hedge these swaps by buying Treasuries, but regulations require capital buffers. If those buffers tighten or banks are stressed, they stop playing.

• That’s what just happened. Hedge funds unwound trades. Banks couldn’t pick up the slack. The system cracked.

This isn't just market plumbing. These swaps and futures help grease the gears of U.S. debt issuance. When spreads collapse, it means clients need more actual cash—at a time when demand for Treasuries is already weak.

The bond market is what the Fed watches when things get scary. Not stocks. Bonds.

If the cracks widen, expect a pivot. Not because inflation is tamed. But because the machine itself is grinding to a halt.

Bonds breaking is how rate cuts begin.

And if that happens?
Buy gold. Sell dollars.

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When Exhaustion Signals a Turning Point

Some weeks test your edge. Others test your endurance. This was both. Volatility stayed above 30 all week.

If your brain’s cooked, that’s normal.

But here’s what actually mattered:

• The Reversal. The S&P tested 4,832 multiple times, then exploded higher. Wednesday’s move? A 9% surge. One of the strongest sessions in history. That’s not noise. That’s a potential turning point.

• The Pattern—lows on Monday, a bounce Tuesday, and a mid range test Wednesday that didn’t break. Then we ripped. That’s a classic bottoming structure.

• The Bond Tell. China dropped the hammer on Treasuries after fresh tariffs. Bonds imploded. But equities didn’t break. That’s your tell.

If you ask me, this is China wailing on the U.S. bond market as we tariff each other into oblivion.

That’s the risk: China keeps selling, bonds keep bleeding, and the stress spreads to equities.

But this week, stocks held. Even as the bond market buckled.

That’s not weakness.

That might be strength.

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Liquidity Is Getting Noisier

Global liquidity is trending lower. But leading indicators suggest a medium-term rebound is possible. Our models remain constructive:

• Model still points to a U.S. regime of slowing growth and rising inflation through the next 6–12 months.

• Model is bullish across stocks, bonds, commodities, and Bitcoin, and bearish the U.S. dollar—suggesting a risk-on backdrop remains intact.

• Positioning remains mixed:

  • Investment advisors are overweight stocks

  • Systematic funds are underweight

  • Hedge funds are neutral

  • Valuations aren’t at extremes

But here's what’s really messing with the numbers: tariff front-running.

In Q1, we saw a surge in gold imports—not because of demand, but because investors were racing to bring it home before tariffs hit. $10 billion in December. $30 billion in January. That’s not GDP. That’s capital movement.

And it’s not just gold. Whiskey, wine, and countless other goods are being imported early, not because the economy is booming, but because businesses are trying to beat tariffs. This distorts GDP estimates, trade balances, and inventory levels—making data harder to trust.

Even the Atlanta Fed’s GDPNow model had to adjust. But noise remains. We’re in a headline-driven market, where fear of tariffs is driving short-term decisions, not long-term growth.

Meanwhile, domestic liquidity is stuck in a tug of war:

• The TGA is draining (liquidity positive)

• RRP is flat-to-up (liquidity negative)

• The Fed is slowing quantitative tightening, reducing Treasury runoff from $25B to $5B/month

Liquidity isn’t drying up—but it’s distorted.

And until the fog clears, so is the data.

Sector weights have remained the same from last week.

If you would like to see all of our positions, click here.

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Against All Odds Research

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