Expensive is not an excuse

On today’s show we are looking at an event in financial markets that could represent a tipping point. These events have occurred with regularity over the years. Think of the Greek Sovereign debt crisis in 2012 that threatened to topple the entire European banking system. Think of Lehman Brothers in 2008. There was the bank failures in the US in 2023. These events often expose the counter party risk that is inherent in our globally interconnected financial system.

The problem is showing up in the latest spike in US Treasury yields. It happened very rapidly between May 1 and May 2 of last week.

Now we have become accustomed to very high volatility in US Treasury yields. Most of that is routinely blamed on the unpredictable nature of the White House.

But this one was different. There was no news from the White House that fundamentally would affect Treasury yields. The threat to impose tariffs on foreign movies is not enough to move the needle. So who is dumping US Treasuries? What happened at the same time as the spike in US Treasury yields was a precipitous drop in the Taiwanese dollar against the US dollar.

So who in Taiwan is dumping Treasuries? It turns out that Taiwanese life insurance companies had loaded up on US Treasuries and failed to purchase a hedge against interest rate volatility.

Why did they not buy insurance? They thought the insurance was too expensive. The liberation day announcement from Donald Trump had been pending for weeks. It was making front page headlines around the world, and still the risk managers at these Taiwanese insurance companies thought that they would take the risk and not buy the insurance. The high price of the insurance was a reflection of the elevated risk.

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