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Are Investors Worried Enough?

BentinPartner Weekly

All three major US equity indices showed losses for the week. Bonds also got hit with yields rising across the board with the 10-30-year bonds reaching 5% (and mortgage rates at close to 8%), surging 30bps on a confluence of factors extending well beyond the inflation outlook and what increasingly appears as a supply/demand imbalance for US Treasuries.

The US budget deficit was reported last week to have exploded (prior to the additional military support package of USD100bn) to USD1’695bn in fiscal 2023, the largest deficit since the COVID outbreak, a 23% jump from last year. Total revenues dropped 9% as taxes from poor financial markets last year diminished, coupled to a USD106bn drop in Federal Reserve revenues which had to pay higher interest rates on bank reserves while social security spending also increased 10% due to cost of living adjustments. The interest rate cost on the USD23trn debt outstanding also increased 23% to a fresh record at the same time as foreign appetite remains subdued (and in the case of China net selling including to protect the yuan).

Not helping matters, is the cumulated loss on bond holdings which is getting investors cold footed to still consider 10-30year bonds as safe haven investments in periods of turmoil with a standard portfolio of investment graded bonds that was marked at 1mn as early as the beginning of 2022, now only worth 600k.

Bond pressure was broad based including in Japan where the BoJ announced an unscheduled bond purchase program on Wednesday to signal its determination to keep yields anchored after 10 year yields reached a 10 year high at 81bps (see chart of 10y JGB yield) with limited effects as the bond auctions from last week met very tepid client demand.

Credit spreads also widened on risk aversion in sympathy with lower equity prices and as recession concerns about the economy returned on the table.

The VIX index rose above 20, seemingly departing from a long-term declining trend,

Elsewhere, China injected a record amount of liquidity into the markets (USD100bn) on Friday with reverse repos in support of equity and bond markets. At 4.9%, China’s GDP exceeded expectations with double digits government induced credit growth supporting activity amidst the continued slump and turmoil in the real estate market. Chinese banks reportedly sold USD19.4bn for their clients in September, the most since November 2018 with modest pressure still observed on CNY despite the dollar trading 0.5% lower last week vs. its major DM peers.

Adding to recent concerns voiced by R. Dalio and JPMorgan’s CEO J. Dimon, Elliott Investment Management founder P. Singer said the world is much more perilous than markets are pricing in and “investors aren’t nearly as worried as they should be”.

US President Biden urged Americans to support an additional military package of USD100bn to support Israel and Ukraine, saying both are fighting for Democracy, that supporting both was vital for US National Security and that the world is looking at America for leadership.

China said on Friday it would require export permits for exports of some graphite products which will likely constrain the production of Electric vehicles outside of China, also “to protect National Security”.


Over the past week, the S&P500 sold off by -2,4% (10,1% YTD) while the Nasdaq100 sold off by -2,9% (33,2% YTD). The US small cap index sold off by -2,2% (-4,5% YTD, Z-score -2,3). AAPL sold off by -3,3% (33,1%).

Cboe Volatility Index rallied 12,4% (0,2% YTD, Z-score 2,4) to 21,71.

The Eurostoxx50 sold off by -2,5% (9,4%, Z-score -2,5), underperforming the S&P500 by-0,1%.

Diversified EM equities (VWO) sold off by -2,9% (-2,8%, Z-score -2,5), underperforming the S&P500 by-0,5%.

The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies dropped -0,3% (7,3%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) dropped 0,0% (0,4%).

10Y US Treasuries underperformed with yields rising 30bps (104bps) to 4,91%. 10Y Bunds climbed 15bps (32bps) to 2,89%. 10Y Italian BTPs underperformed rising 15bps (21bps) to 4,93%, matching Bunds.

US High Yield (HY) Average Spread over Treasuries climbed 23bps (-34bps) to 4,35%. US Investment Grade Average OAS climbed 7bps (-3bps) to 1,40%.

In European credit markets, EUR 5Y Senior Financial Spread climbed 5bps (3bps) to 1,03%.

Gold rallied 2,5% (8,6%) while Silver rallied 2,9% (-2,4%). Major Gold Mines (GDX) gained 1,8% (2,9%).

Goldman Sachs Commodity Index gained 1,1% (1,9%). WTI Crude gained 0,4% (9,7%).


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Marc Bentin serves as Economic Advisor to Blue Lotus Management,

a specialist multi-manager investment firm, which seeks to provide investors a compelling alternative to the traditional 60/40 equity and bond portfolio by targeting higher returns without amplifying equity risks.

BentinPartner GmbH is Advisor to the Phi Funds AIF, an umbrella Alternative Investment Fund registered and regulated in Lichtenstein, specializing in the management of Funds focused on physical precious metals.


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