Three kills for stocks and bonds! The "Sell U.S." trade is back, why is the market accustomed to TACO suddenly mutating?

# Source: Wall Street CN

# By: Ye Zhen

Concerns over the unwinding of carry trades triggered by Japan's fiscal crisis, coupled with Donald Trump's repeated provocations of geopolitical tensions, have finally broken investors' patience, sending U.S. financial markets into a simultaneous slump in stocks, bonds and the dollar. Some analysts also claimed that Europe may be deliberately creating market volatility to coerce Trump, who cares most about the stock market.

As geopolitical disputes over Greenland intensified and domestic fiscal worries in Japan roiled the global bond market, the eerie calm that had gripped Wall Street for weeks was completely shattered, and the "Sell America" trade made a violent comeback to the market's attention.

After the opening bell on Tuesday, U.S. financial markets were hit by a **triple whammy** of falling stocks, bonds and the dollar. The S&P 500 plummeted more than 2%, erasing all its gains so far this year and logging its biggest single-day drop in over three months.

The CBOE Volatility Index (VIX), a gauge of market fear, surged to its highest level since last November. Meanwhile, risk aversion drove gold prices to a record high above $4,700 per ounce, U.S. Treasury yields climbed markedly, and the U.S. dollar exchange rate slid in tandem.

The global market sell-off was initially sparked by domestic issues in Japan. The yield on Japan's 30-year government bonds soared more than 25 basis points in a single day, as markets fretted that Prime Minister Sanae Takaichi's tax-cut and spending-boost plans would jeopardize the country's fiscal health. This volatility threatened the carry trade— a strategy of borrowing low-interest yen to purchase global assets— and pushed bond yields higher across other regions.

Investors had mostly turned a blind eye to the Trump administration's actions in the past, including its intervention in the Venezuela situation, threats against neighboring countries and attacks on the Federal Reserve, but this patience is now wearing thin. Trump's bid to gain U.S. control over Greenland has stoked fears of worst-case scenarios, including a potential rupture of the NATO alliance or a full-scale trade war.

Faced with escalating tensions, some analysts pointed out that creating market turbulence may be emerging as one of Europe's tactics to counter pressure. Michael Krautzberger, Chief Investment Officer at Allianz Global Investors, said: "If I were advising some European governments, I would say you almost need to create some market volatility because Trump cares so much about it— possibly more than any other politician."

## Farewell to the TACO Trade, Volatility Returns

Over the past month, the volatility of U.S. bonds, stocks and the dollar had dropped to its lowest level since at least 1990. As previously noted by Wall Street CN, this unusual calm was partly due to traders becoming immune to Trump's rhetoric, betting that he would always back down at the last minute— a strategy dubbed the "TACO" trade.

However, Tuesday's market moves marked a reversal of this sentiment. As the trading session progressed, the S&P 500's losses widened and hit fresh lows while Trump delivered a speech at the White House touting his first-year achievements. In the U.S. Treasury market, long-dated bonds were hit hardest, with the yield on the 30-year Treasury climbing 8 basis points to 4.92%, approaching its late-2023 peak.

All major U.S. stock indexes suffered sharp declines, led by the Nasdaq and the S&P 500.

(US Treasury yields rebound)

The global market sell-off was initially sparked by domestic issues in Japan. The yield on Japan's 30-year government bonds surged more than 25 basis points amid concerns over the Japanese Prime Minister's tax-cut and spending-increase plans. This jump threatened the so-called carry trade— a strategy of borrowing low-interest yen to buy global assets— and boosted bond yields across the rest of the world.

(Japanese government bond yields rise across the board)

At the same time, Trump's belligerent stance toward European allies has amplified investor anxiety, providing another reason for the market to pull capital out of U.S. Treasuries. Danish pension fund AkademikerPension announced that it will liquidate all its U.S. Treasury holdings by the end of this month, citing concerns over the significant credit risks created by the Trump administration.

Anders Schelde, Chief Investment Officer of AkademikerPension, told Bloomberg: "The United States is basically not a good credit counterparty, and the U.S. government's finances are unsustainable in the long run."

## Rising Market Uncertainty Amid Geopolitical Games

Although the prevailing investor view is that the U.S. and Europe will eventually reach a diplomatic resolution on the Greenland issue, the White House's chaotic negotiating style— including Trump adding French champagne to the tariff threat list— is cooling market confidence.

Previously, U.S. stock investors paid little attention to geopolitical frictions, with U.S. equities continuing to climb in early January driven by the AI boom and strong earnings prospects. The latest survey by Bank of America Corp. showed that investor sentiment had hit its most optimistic level since July 2021, with cash holdings falling to a record low.

Yet the market now has to confront uncertainty. Mohit Kumar, strategist at Jefferies, speculated that while an agreement may eventually be reached to de-escalate tensions, it could take months, during which time the market will face heightened volatility. He noted: "The beneficiaries of escalating geopolitical tensions will be defense stocks, financial stocks and gold— assets we are long on in our portfolios."

Alexis Bienvenu, portfolio manager at La Financière de l’Échiquier, echoed similar concerns: "The market is a bit worried about how far he will go with this new type of threat. While we know that in many cases, Trump has threatened companies and countries with extremely high tariffs, he has ultimately come to the negotiating table."

Krishna Guha, Head of Central Bank Strategy at Evercore ISI, wrote in a report: "Our base case is that the severity of the situation will ultimately be contained as investors bet on some form of compromise. But if things spiral out of control, the impact will be very severe and have long-term consequences, including for the U.S. dollar."

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