The Treasury Secretary and the Maestro
Doug Nolan
South Korea’s KOSPI equities index sank 10.0% Tuesday, rallied 3.3% Wednesday and an additional 5.4% Thursday, before sinking 5.8% in wild Friday trading.
At intraday Friday lows, the index was down 9.3%.
Japan’s Nikkei 225 Index was 5.4% lower at Friday’s intraday trough, ending the session with a 4.2% loss.
Taiwan’s TAIEX Index lost 4.6% in Friday trading, with China’s CSI 300 Index down 3.0%, and Hong Kong’s Hang Seng Index 1.8% lower.
AI Bubble leaks.
The Dollar Index traded this week to a one-year high.
The Norwegian krone lost 2.3%, the New Zealand dollar 1.7%, the Australian dollar 1.7%, and the Swedish krona 1.6%.
EM currency losers included the Russian ruble (6.7%), Chilean peso (2.0%), Thai baht (1.6%), Polish zloty (1.4%), and the Hungarian forint (1.3%).
The iShares Emerging Markets ETF (EEM) dropped 5.1% this week.
“EM Stocks Post Worst Week in More Than Three Months on AI Rout.”
Even with Friday’s 1.5% rally, the MAG7 Index ended the week down 5.5%.
At Thursday’s intraday lows, MAG7 suffered a 14% m-t-d loss.
Losses this week included Nvidia 8.6%, Alphabet/Google 8.3%, Tesla 5.2%, Amazon 4.8%, Apple 4.8%, and Meta Platforms 4.7%.
SpaceX sank 17.2%.
June 26 – Bloomberg (Caleb Mutua, Ying Luthra, and Brian W Smith):
“SpaceX’s blockbuster bond sale is weakening so quickly in the secondary market that traders say they can’t recall another recent deal that widened this sharply.
One large dealer was quoting SpaceX bonds maturing in 2056 on Friday at levels as much as 0.32 percentage point wider than the issue price of 1.75 percentage points above Treasuries…
Paper losses on SpaceX’s $25 billion offering have mounted since the debt began trading and totaled roughly $305 million as of late Thursday relative to Treasuries.”
It’s worth noting that Oracle CDS (Credit Default Swap prices) surged 16 this week to an eight-week high of 172 bps (began ’26 at 145).
CoreWeave bond yields (8.5%, 2032) surged 37 bps to 8.64%.
High yield spreads (to Treasuries) widened a notable 17 bps – the largest widening since the start of the war – to 282 bps (high since April 7th).
Leverage Loan prices fell 27 cents to 94.95 (low since April 15th).
Meanwhile, weekly junk issuance surpassed $7 billion, according to Bloomberg, “the busiest since early this month.”
Month-to-date issuance is a chunky $33.5 billion.
June 24 – Bloomberg (Jack Trapanick):
“US investment-grade bond sales set another record in June, fueled by voracious investor demand and a wave of borrowing tied to the artificial intelligence spending boom.
Issuance has reached $175 billion…, 60% above that for all of June 2025 and topping the old high set in 2020 — when near-zero interest rates in the wake of the Covid-19 pandemic helped drive a borrowing frenzy…
Sales opened 2026 with a record January, followed by the second-highest volumes the following three months.
At $1.15 trillion, this year’s investment-grade supply is equal to this point in 2020.
Issuance for all of that year reached $1.75 trillion…”
At least in some market sectors, there’s some real pain developing.
Bitcoin dropped another $3,350, or 5.3%, to $59,850, the low back to September 2024 (down 31.7% y-t-d).
WTI crude was pummeled 10.7% to $69.23, the low since early March.
Silver was slammed 8.9%, trading below $60 for the first time since December (down 17.5% y-t-d).
The Bloomberg Commodities Index lost 3.1%.
Outside of energy, commodity losses this week included Aluminum 6.4%, Nickel 5.0%, Cotton 5.7%, and Wheat 4.5%.
Trading dynamics point to faltering hedge fund trades and strategies.
The long “big tech” versus shorts elsewhere has been a recent loser.
For the week, the Nasdaq100 dropped 4.2%, while the small cap Russell 2000 advanced 1.0%.
Indicative of the unwind of “pairs trades,” the Goldman Sachs short index outperformed again this week, rising another 1.9%.
Curiously, the Broker/Dealer index was hammered 4.8% this week, as the (typically correlated) KBW Bank index rose 1.5% (trading Thursday at an all-time high).
There was some “risk off” movement this week in high yield spreads and CDS, leveraged loans, and swap spreads.
Treasuries and global bonds appeared to benefit somewhat from safe haven demand (and short covering).
Most financial conditions indicators, however, held notably steadfast at “loose.”
Considering the degree of cross asset market instability, especially volatility and losses in “big tech,” I would have expected more of a market shift to incipient risk aversion.
I expect de-risking/deleveraging to gain momentum.
But it’s almost as if U.S. markets assume “the fix is in” for the midterms.
June 24 – Reuters (David Lawder and Susan Heavey):
“U.S. Treasury Secretary Scott Bessent… applauded Federal Reserve Chair Kevin Warsh’s plan to reduce forward rate guidance, but said Fed policymakers need to keep an open mind on the inflation impact of the Iran conflict and productivity gains driven by artificial intelligence models.”
June 24 – Axios (Courtenay Brown):
“In a speech in New York…, Treasury Secretary Scott Bessent said that a long-running bet on cheaper goods and deeper economic integration making America richer and safer had failed.
The speech set a framework for President Trump’s economic policies since his second term, including tariffs and calls for reshoring.
But it also suggests that those policies may be part of a broader rethinking of globalization that extends well beyond one administration...
‘The nation that depends on its adversaries for critical inputs is not truly sovereign.
And the nation that reduces its economics to consumption is not truly prosperous,’ Bessent told the Economic Club of New York.
Policymakers incorrectly assumed that ‘low prices would compensate for lost capacity,’ he added.
Bessent argued that America got cheaper goods and more efficient supply chains, but became too dependent on foreign countries in the process.
He said the answer is an economic strategy that puts greater weight on domestic production, supply chain resilience and national security.”
Extracts from Bessent’s Wednesday policy speech:
“In my remarks before the Economic Club of Dallas, I detailed how the structural vulnerabilities that we allowed to accumulate over time precipitated a drift into dependence.
And last month… I noted that under President Trump, America has awoken to the risks we can no longer ignore and is now attuned to the responsibilities we can no longer neglect.
So tonight, I would like to take the next step and describe our strategy for economic statecraft, by which I mean the disciplined use of America’s economic power in service of our sovereignty.”
“We opened our market because it helped to create a more prosperous world.
And we tolerated imbalances because American economic strength appeared unassailable.
Over time, however, those choices hardened into habits.
Habits into assumptions.
And assumptions, left unexamined, into vulnerabilities.
We came to believe that access to the American market could be extended without condition—and therefore without consequence.”
“And to repair those imbalances with the world is not to retreat from it.
On the contrary, it is to engage on terms that make America stronger.
It is to insist on trade that is fair, reciprocal, and consistent with our national interest.
And it is to more closely bind what we should have never allowed to cleave: our economic and national security.”
“So tonight, guided by these priorities, I want to organize our approach to economic statecraft under President Trump around five core principles.
The first is that economic security begins with national capacity…
The nation that depends on its adversaries for critical inputs is not truly sovereign.
And the nation that reduces its economics to consumption is not truly prosperous.”
“The second principle is that America’s openness will be matched by reciprocity, which is the basis of durable cooperation…
The third principle is that America will write the rules of the next economy…”
“The fourth principle is that financial leadership is a central instrument of statecraft…
Of course, that leadership role bestows enormous advantages, among them lower borrowing costs, deeper capital markets, enhanced sanctions capabilities, and great influence across the global financial system.”
“The fifth and most important principle is that economic statecraft must serve the American people.
The purpose of American economic statecraft is to connect national power with household prosperity.”
I have long argued against massive current account deficits and the hollowing out of our nation’s manufacturing base.
For decades, trading endless dollars for imported goods and services has been the path of least resistance.
There have been major Washington policy mistakes.
Foreign countries have certainly been content to exploit opportunities.
But I have a fundamental disagreement with the Trump administration’s prognosis.
Three decades of loose finance, Credit excess, and market Bubbles are the root cause of our nation’s vulnerabilities and global imbalances.
Why manufacture when we can so easily finance all the imports we desire?
Flooding the world with dollar balances has come with momentous consequences at home and abroad.
For much too long, we have wielded our unique power to inflate finance.
This overworked expedient is coming home to roost.
“I think we’re going to have a high GDP economy, without the traditional inflation seeping in.
And as over the past few days, we’ve read the obituaries on Alan Greenspan.
He had the foresight that in the ’90s, productivity was about 1.5% or leading into the ‘90s, he saw that the office modernization and the internet could be a boom for non-inflationary growth.
And he let the economy, you know, I think that there was an early ’97, there was one tap on the brakes rate hike.
But other than that, we had the longest sustained growth period in history.
And I think there’s a very good chance that we could see that again.”
- Treasury Secretary Scott Bessent, interviewed by CNBC’s Joe Kernen, June 24, 2026
And from December (All-In Podcast):
“If we go back to the 1990s, Alan Greenspan did a magnificent job, because he had an open mind that the Internet and office modernization boom was going to create a productivity bonanza for the U.S. economy.
And he let it rip.”
“President Trump has left no stone unturned in his effort to spur investment in the American economy—from reordering the global trade landscape to creating an entirely new investment vehicle for newborn Americans.
But the White House can only do so much; at a certain point, the Federal Reserve must also do its part to spur investment.
The Fed needs to have merely an open mind. The open-mind maestro, former Fed Chairman Alan Greenspan, resisted premature rate hikes during the technology boom of the 1990s—and history proved him right.”
- Scott Bessent comments to the Economic Club of Minnesota, January 8th, 2026
Alan Greenspan lived an extraordinary life.
He was a three-year-old toddler during the 1929 stock market crash – an adolescent of the Great Depression.
Greenspan passed away Monday, as the Semiconductor Index (up 106% y-t-d) posted an all-time high.
Ayn Rand disciple and free market ideologue.
Townsend-Greenspan & Co. Advisor to Presidents Nixon and Carter.
Replacement to Paul Volcker, serving as Fed Chairman from 1987 to 2006.
“The Maestro.”
My career in the markets overlapped Scott Bessent’s.
Post-1987 stock market crash excesses (i.e., real estate, junk bonds, M&A, S&L excess) culminating with an early-nineties deep recession and banking crisis.
Greenspan slashed rates to a then remarkable 3%, creating an artificially steep yield curve to help recapitalize a deeply impaired banking system.
This policy was instrumental in promoting leveraged speculation, the fledging hedge fund community in particular, along with Wall Street financial engineering.
Unprecedented leveraged speculation ensured that a “baby step” 25 bps rate increase in February 1994 triggered a highly destabilizing deleveraging and bond/derivatives market crisis.
It wasn’t recognized as QE – and in fact it wasn’t recognized at all.
But the GSEs stepped up in 1994 for an unprecedented $150 billion of marketplace liquidity.
As they say, “the rest is history.”
Between the GSE market bailout and Washington’s Mexico bailout, it was off to the races.
U.S.-generated (hedge fund leveraging and current account deficits) finance was instrumental in financing the Asian Tiger Bubbles, which collapsed horrendously in 1997.
Things really came home to roost in September 1998, with the Russia and Long-Term Capital Management (LTCM) collapses.
More bailouts.
Greenspan:
“Had the failure of LTCM triggered the seizing up of markets, substantial damage could have been inflicted on many market participants… and could have potentially impaired the economies of many nations, including our own.”
The Nasdaq Composite returned 85.6% in 1999 – and another 24% in 2020 through March 10th.
The nineties Bubble collapsed, with the Nasdaq losing 78% of its value at October 2022 lows.
Rates were slashed to an unprecedented 1%.
Household mortgage Credit expanded 10.8% in 2001, 13.3% in 2002, 12.8% in 2003, 14.3% in 2004, 13.7% in 2005, and another 11.5% in 2006.
System repo assets expanded 13.8% in ‘03, 18.7% in ‘04, 11.9% in ‘05, and 14.2% in ’06.
Broker/Dealer assets expanded 21.3% in ’03, 23.5% in ‘04, 9.5% in ‘05, and 17.8% in ‘06.
Greenspan discussed a so-called “conundrum” in early 2005 – the Fed having raised the federal funds rate by 150 bps since June 2004, but the 10-year Treasury yield remained essentially unchanged.
There was no conundrum.
Massive leveraged speculation was over liquefying debt markets, certainly including Treasuries, MBS, and non-conforming mortgage ABS.
Why such confidence within the rapidly expanding leveraged speculating community?
A long history of reliable bailouts, Greenspan’s “asymmetrical” (cut aggressively, raise cautiously) monetary policy, and unlimited GSE liquidity.
GSE assets expanded $305 billion in 1998, $317 billion in 1999, $242 billion in 2000, $345 billion in 2001, $242 billion in 2002, and another $246 billion in 2003.
Accounting scandals concluded GSE market liquidity backstop operations, with Fed QE taking over in 2008.
“As Fed chair, Greenspan relished poring over obscure economic data, from monthly boxcar loadings to steel production, all in a bid to assess where the economy was going.
He would often phone economists at other government agencies to discuss details, and he would rise early each morning for a two-hour soak in his bathtub, using that time to review statistics and Fed staff memos.”
- PBS, Martin Crutsinger, June 22, 2026
Alan Greenspan enjoyed a celebrated obsession with analyzing data.
Did he monitor Fannie and Freddie's monthly activity reports?
Did he study the Fed’s own quarterly Z.1 Credit and flow of funds data?
Wall Street firms’ quarterly financial filings?
Bessent:
“Alan Greenspan resisted premature rate hikes during the technology boom of the 1990s—and history proved him right.”
Well, the Treasury Secretary should know that’s BS.
“We had the longest sustained growth period in history.”
Greenspan aptly titled his 2007 memoir “The Age of Turbulence.”
Bessent:
“He let it rip.”
Undoubtedly true.
And our system – and the world – has suffered unrelenting boom and bust cycles since the Greenspan Fed unleashed unfettered Credit – historic booms in non-bank finance, leveraged speculation, derivatives, securitizations, the GSEs, and “Wall Street finance” more generally.
Scott Bessent was in the catbird’s seat for all this.
To be sure, our economy must restructure.
There is no other option than to become more self-sufficient.
Revitalizing a strong manufacturing base is an imperative.
It took us decades to dig this hole. Rectification will be a lengthy and arduous process.
Dysfunctional finance continues to only deepen our massive hole.
The problem I have is that the administration is hellbent on prolonging loose conditions and Bubble excess to achieve political aims.
Deregulation at peak Bubble excess.
$2 TN plus deficits as far as the eye can see.
The current trajectory of debt growth, financial excess, and economic maladjustment ensures a highly destabilizing crisis of confidence.
As I’ve argued for years, inflationism is not the solution - it’s the problem.
Just over four months until the midterms.
We live in a most extraordinary period.
A report this week from Federal Reserve economist Phillip J. Monin, “Decomposing Hedge Funds’ U.S. Treasury Exposures,” provides important insight into massive hedge fund positioning throughout Treasury and repo markets.
With speculative leverage having such a profound impact on marketplace liquidity and bubble inflation, I've heavily extracted from Dr. Monin's report.
“Overall, hedge funds' Treasury positions are large in both absolute and relative terms, with the basis trade at $830 billion, swap spread arbitrage at $305 billion, and maturity-matched trades at $395 billion.
With hedge funds holding about 8.5% of total outstanding Treasuries and about 90% of these exposures concentrated among the top 50 funds, the combination of large scale, high concentration, and elevated leverage creates the potential for systemic stress if multiple strategies face simultaneous pressure or if severe shocks affect the largest participants.”
“Hedge funds’ repo cash borrowing has grown to $3.0 trillion as of September 2025.
The scale of this expansion is striking: since the beginning of 2023, hedge funds' gross Treasury exposures, repo borrowing levels, and monthly turnover in Treasury markets have all more than doubled.”
“Between 2023 and September 2025, large hedge funds' gross U.S. Treasury exposures doubled to $4.0 trillion, comprising $2.4 trillion in long exposure and $1.6 trillion in short exposure.”
“We find that highly leveraged arbitrage strategies dominate hedge funds’ Treasury positioning.
The Treasury cash-futures basis trade has grown to approximately $830 billion as of September 2025, about double its previous peak in early 2020 and representing 35% of hedge funds' total long Treasury exposures.
The swap spread arbitrage trade reached approximately $305 billion (13%) by September 2025, though it experienced notable stress following the April 2025 tariff announcements when about $60 billion unwound rapidly before recovering within months.
Beyond these directly estimated arbitrage trades, we identify substantial positioning in broader trade categories: maturity-matched trades (including on-the-run/off-the-run arbitrage and other strategies with approximately equal durations) totaling $395 billion (17%), and steepener-like trades totaling $375 billion (16%).”
“A key driver of the growth of hedge funds' Treasury exposures has been the resurgence of the Treasury cash-futures basis trade.
The basis trade is constructed by going short a Treasury futures contract and long a repo-financed Treasury security that is deliverable into the futures.
The trade is typically highly leveraged due to low or zero percent haircuts on the repo borrowing and low margin requirements on the futures.
While the basis trade plays an important role in price discovery and liquidity provision, it also presents financial stability risks due to its substantial and interconnected exposures across Treasury cash, futures, and repo markets, combined with its high leverage and potential for rapid growth.”
“Another relative value trade that has recently gained popularity among hedge funds is the swap spread arbitrage trade.
The long swap spread arbitrage trade involves balanced positions in repo-financed Treasury securities and a pay-fixed, receive-floating position in an interest rate swap…
Our estimates suggest that long swap spread arbitrage positions were relatively modest until 2019, when they increased to approximately $100 billion.
Positions declined following March 2020 and then steadily increased starting in late 2022.
Growth accelerated sharply in late 2024 and early 2025, with positions increasing approximately $175 billion between January 2024 and March 2025, reaching about $295 billion.”
“The April 2025 tariff announcements triggered steep declines in swap spreads amid sharply increased Treasury yields and deteriorating Treasury market liquidity.
Market participants noted that strained conditions in Treasury markets were likely exacerbated by hedge funds rapidly unwinding their swap spread trades…”
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