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The term premium in US Treasuries is rising, see first chart below. The market does not know if this is because of the fiscal situation, inflation expectations becoming unanchored, or discussions about who the next Fed Chair will be.
Some of the move higher in rates has been technical, driven by unwinds of levered basis trades and swap trades.
In addition, the move lower in the dollar is telling us that the move higher in rates is also because of foreigners selling Treasuries.
For example, Japanese investors have in recent weeks been significant sellers of foreign bonds, and this has been associated with a significant appreciation of the yen relative to the dollar. This does not necessarily mean that Japanese investors are questioning American exceptionalism. In fact, in 2022, when the Fed started raising interest rates, Japanese investors were also significant sellers of foreign bonds, see second chart below.
We are hosting a conference call today at 9 am EDT to discuss what is going on in markets and the outlook for the economy, you can register here.
Note: The NY Fed measure for the term premium is based on a five-factor, no-arbitrage term structure model. Sources: New York Fed, Bloomberg, Apollo Chief Economist 
Sources: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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If the US enters a recession, long-term interest rates are likely to go down, and it would be cheaper for the US government to refinance existing government debt.
However, the chart below shows that the interest payments saved if interest rates decline by two percentage points would be more than offset by the deterioration in government finances associated with a recession.
Specifically, if interest rates decline by two percentage points, the US government would save around $500 billion in annual interest payments. But if the US enters a recession, the government will have lower tax collections and pay more in unemployment benefits, and the historical deepening of the budget deficit during recessions of around 4% of GDP would correspond to an additional $1.3 trillion erosion of US government finances measured in 2025 dollars.
The bottom line is that it is not possible to improve the budget deficit by creating a recession because during a recession government finances would deteriorate by double the amount saved in interest payments, see chart below.
Note: Assuming a decline in interest rates by two percentage points relative to current CBO assumption resulting in $568 billion interest expense savings on Federal debt. Fiscal deficit rising by 4.4% GDP on average in the past recessions since 1968. Sources: US Treasury, CBO, Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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My colleague Shobhit Gupta has calculated bid-ask spreads for investment grade (IG) bonds based on trader quotes, see chart below.
Liquid securities are defined as $1 billion-plus deals issued in the past year. Off-the-run bonds are those issued more than two years ago with deal sizes less than $900 million, and these bonds make up 50% of the IG market by count.
The chart shows that bid-ask spreads have spiked post the April 2 tariff announcement.
The gap between liquid and illiquid bonds is particularly noteworthy. In 2020, the bid-ask spread widened across the whole market. But this time around, transaction costs have increased materially more for off-the-run paper. This highlights the growing liquidity divide in the public IG market. Liquidity in on-the-run bonds has improved, but off-the-run paper has become virtually untradeable and effectively a buy-and-hold investment.
Note: Chart shows estimated bid-ask for IG bonds based on trader quotes. Liquid securities defined as $1 billion-plus deals issued in the past year. Off-the-run bonds are those issued more than two years ago with deal size <$900 million. (These bonds make up 50% of the IG market by count.) Sources: Shobhit Gupta, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The 60/40 portfolio has basically gone nowhere since the beginning of 2022, with only a 2% annual return for the past three and a half years, see chart below.
Sources: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The April survey of consumer sentiment from the University of Michigan shows the following:
- Consumer sentiment is declining rapidly both for households making more than $100,000 and less than $100,000 (see the first chart).
- Consumers’ worries about losing their jobs are at levels normally seen during recessions (see the second chart).
- A record-high share of consumers think business conditions are worsening (see the third chart).
- Households’ income expectations are declining (see the fourth chart).
- Inflation expectations are rising at an unprecedented speed (see the fifth chart).
The bottom line is that consumer sentiment is very weak, and the fear is that this will spill over to weaker actual spending.
Sources: University of Michigan, Haver Analytics, Apollo Chief Economist 
Sources: University of Michigan, Haver Analytics, Apollo Chief Economist 
Sources: University of Michigan, Haver Analytics, Apollo Chief Economist 
Sources: University of Michigan, Bloomberg, Apollo Chief Economist 
Sources: University of Michigan, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Daily data of the number of arrivals at the top 10 airports in the US has shown a rapid decline since late February, see chart below. This is likely a mix of declines in business travel, tourism, and government travel.
Note: Airports included are ATL, LAX, DFW, MIA, ORD, DEN, IAD, SFO, MCO, and JFK. Sources: CBP, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The textbook would be saying that when the stock market is going down, long-term interest rates should also be going down.
But this is not what is happening at the moment, see chart below.
What could be the reasons why long-term interest rates are moving higher when the stock market is moving lower?
1) With the yen, euro, and Canadian dollar strengthening at the same time, this could be foreigners selling US Treasuries.
2) With the VIX at elevated levels around 50, there is a lot of hedging activity going on, and it could, therefore, be risk reduction among large asset managers managing rates, credit, and equities.
3) With almost $1 trillion in the basis trade, it could be an unwinding of the basis trade among levered hedge funds.
The answer is likely some combination of these three forces.
Note: Data starts from January 2020. Sources: Bloomberg, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Foreigners own $19 trillion in US equities, $7 trillion in Treasuries, and $5 trillion in US credit, see chart below.
That corresponds to 20% of US equities, 30% of Treasuries, and 30% of credit outstanding.
Sources: Federal Reserve, MacroBond, Apollo Chief Economist See important disclaimers at the bottom of the page.
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As tariffs are implemented, they will have negative consequences for corporate earnings over the coming months. Combined with uncertainty about retaliation, lower consumer sentiment, lower corporate sentiment, and the negative wealth effect of the $10 trillion decline in the stock market, we continue to worry about downside risks to markets and the economy.
We will be discussing these headwinds to growth and recent developments in Washington, DC and financial markets on a conference call today at 9:00 am EDT. You can register here, and the chart book we will be using is available here.
Source: Apollo Chief Economist See important disclaimers at the bottom of the page.
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Something very unusual happened in financial markets yesterday. Long-term interest rates went up 20 basis points despite stocks going down. One potential reason for the move higher in rates is an unwind of the basis trade.
The basis is the difference in price between a Treasury security and a Treasury futures contract with similar characteristics.
The source of this price difference is demand and supply imbalances in Treasury markets, or arbitrage limitations for regulatory reasons.
In the basis trade, hedge funds put on leveraged bets, sometimes up to 100 times, with the goal of profiting from the convergence between the futures price and the bond price, as the futures contract approaches expiry.
How big is the basis trade? It is currently around $800 billion and an important part of the $2 trillion outstanding in prime brokerage balances. It will continue to expand as US government debt levels continue to grow, see charts below.
Why is this a problem? Because the cash-futures basis trade is a potential source of instability. In case of an exogenous shock, the highly leveraged long positions in cash Treasury securities by hedge funds are at risk of being rapidly unwound. Such an unwind would have to be absorbed, in the short run, by a broker-dealer that itself is capital-constrained. This could lead to a significant disruption in market functions of broker-dealer firms, such as providing liquidity to the secondary market for Treasuries and intermediating the market for repo borrowing and lending. For example, during Covid, the Fed was at the peak buying $100 billion in Treasuries every day.
In addition, if the supply of Treasuries grows further, for example, because of a growing budget deficit or the Fed doing quantitative tightening, it will potentially depress Treasury prices, hurting the long leg of the trade, and stress repo funding, as dealers have limited balance sheet capacity.
The bottom line is that the large and growing cash-futures basis trade, driven by leveraged hedge fund positions in Treasuries, poses a risk due to potential market disruptions and liquidity issues, especially in the event of an exogenous shock or increasing Treasury supply.
Sources: Commodity Futures Trading Comm, Bloomberg, Apollo Chief Economist 
Note: The data are aggregated responses to SEC Form PF question 43. Only responses from Qualifying Hedge Funds are included. Sources: Data for the US Office of Financial Research, Apollo Chief Economist See important disclaimers at the bottom of the page.
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