It was the worst of times, it was the worst of times.
Of course that is hyperbole, especially considering that over the last 20 years we’ve had to endure the Great Financial Crisis, the COVID pandemic, 9% inflation, and the threat of a run on banks in 2023.
But the end of January saw several headlines that raised jitters to their highest level in months.
Since May 2025, investors had shrugged off one concern after another while pushing U.S. equities, repeatedly, to record highs. A weakening employment picture, naggingly high interest rates, bearish homebuilder sentiment, falling consumer sentiment and concerns over AI exuberance were all dismissed over the second half of 2025.
Yet market confidence fell sharply over the last two weeks.
Volatility in Japanese interest rates and the Yen’s value led to speculation that investors that rely on the Yen-carry trade might head for the exits, en masse. Several times over the last few decades, the unraveling of the trade – and the selling of U.S. risk assets – have jolted the markets. That jolting has not been limited to equity sell offs, either: the undoing of the popular Yen-carry trade normally goes hand in hand with meaningful spread widening for fixed income assets.
Then there was the huge sell off in gold and silver in late January. The last day of the month saw the biggest percentage decline in those metals since 1980.
Crypto was no joy ride either. Already down 30% in late 2025, the market lost another 15% in January.
The U.S. turbulence led to a 5% decline in South Korean stocks Sunday night with trading triggers kicked off to stem the losses. By Monday morning, stock futures for the S&P 500 and Nasdaq were deeply in the red.
That brings us back to our opening line – it was the worst of times, it was the worst of times.
Usually when volatility spikes – as it has over the last week or two – investors can at least count on a healthy rush into U.S. Treasuries and a corresponding decline in U.S. interest rates. Not so, this time. Yes, the yield on the 10-year dipped a few basis points last week, but it was nowhere near the type of decline we’ve become accustomed to in past periods of bumpiness. The yield on the 10-year was at just under 4.25% in early Monday trading was nothing to crow about.
None of this was terribly comforting- especially at a time when most Americans can’t venture outside due to the two-weeks-and-counting Arctic Blast.
Correction or Catalyst? Interpreting the Current Turbulence
There are two ways to potentially think about the current turbulence.
On the one hand, there could be a healthy and long overdue bloodletting.
Stock valuations have been stretched for some time and AI trade was becoming tired. On the fixed income side, risk premiums had been grinding smaller and smaller (or tighter and tighter, take your pick). So much so, that we were growing a little uncomfortable with the amount of return lenders were getting for the risks they’ve been taking. (This is especially true in the bridge lending/subordinated debt space).
To be sure, this is not 2007 when lenders were getting spreads of 25 basis points on AAA-rated, 10-year CMBS and 70 basis points on BBB- CMBS for (barely-there) subordination.
Nonetheless, the continued tightening was starting to feel like a mispricing of risk.
A low-single-digit selloff in equities and some modest spread widening in fixed income lending, may take some risk off the table for investors putting fresh capital to work.
On the other hand, it’s not out of the question that something bigger (and more ominous) is brewing. Conditions seem ripe for a meaningful market reset and now that the AI trade has become long in the tooth, it’s hard to see where the next upside stimulus comes from.
But even there, a silver lining can emerge. During the big Silicon Valley Bank-led market sell off, fixed income spreads blew out and liquidity disappeared. In retrospect, this turned out to be a great time to deploy cash with BBB- CMBS buyers able to get yields of 12-15%.
The lesson for investors is to keep their head on a swivel. These buying opps can come fast, but they tend to disappear just as quickly.
