Ken Griffin Sees ‘Explicit Warning’ for US in Japan Bond Selloff

Summary

At the World Economic Forum in Davos, Citadel's Ken Griffin told Bloomberg's Erik Schatzker that the disorderly selloff in Japanese government bonds is an 'explicit warning' to U.S. politicians that fiscal indiscipline invites bond vigilantes. Griffin warned that if U.S. Treasuries come to be viewed as at risk, bonds and stocks would move together, costing Treasuries their hedging role for equities and forcing much higher demanded yields, which would lift mortgage rates and deficit-financing costs. He said U.S. wealth allows it to sustain current deficit spending for some time, but that delaying a change of direction makes the eventual adjustment more draconian.

• Japanese government bonds sold off in a disorderly move that has been compared to the UK's 2022 gilt crisis.
• Ken Griffin called the JGB selloff an 'explicit warning' that fiscal mismanagement can bring out bond vigilantes.
• Griffin said that if U.S. Treasuries are viewed as at risk, bonds and stocks would move together, eroding Treasuries' portfolio-hedge value.
• He warned such a scenario would mean much higher demanded Treasury yields, higher mortgage rates, and higher deficit-financing costs.
• Griffin said U.S. wealth can sustain current deficit spending for a period, but waiting to change course raises the eventual cost.
• His message to the House and Senate: get the U.S. fiscal house in order.