Plumbing Notes: War & Plumbing

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The Middle Eastern “Not War”1 is creating fragmentation in dollar funding markets. Onshore, conditions remain lax. Money funds have received hefty flight-to-safety inflows, pressuring bill yields and o/n (overnight) rates lower. Offshore, meanwhile, an unwind of low volatility and increased demand for dollar hedging have pressured cross-currency bases wider2. A return to a Global Compression where onshore and offshore $ rates converge will thus only materialize when the Board of Peace earns its title. The duration of the Not War, whether TACOed (i.e. short) or prolonged, has now become key to where dollar funding and rates markets trade.in the right-hand chart, a flatter curve (more negative) suggests more UST frictions, such as from deficit fears. in the left-hand chart, a more negative value implies more $ demandThe geopolitical chessboard, however, suggests the latter. Trump had been widely depicted as the first U.S. leader, perhaps in a century, to attempt a transition away from a longstanding unipolar U.S. order. Instead, as shown by capturing Maduro, increasing arms sales, and seeking to annex multiple islands, Trump has turned out to be a unipolar hawk. Instead of ushering in a multipolar world, POTUS has upheld America’s global “security pact”, in which the developed world, ex-Iran and Russia3, “employs” the U.S. empire to enforce clear waters and airways, enabling free trade. Enemies of this security pact face the reality that damaging global trade, financial markets, and the U.S. dollar hurts them more than they hurt America and its allies. Inflicting substantial …