Either the dollar has to fall or Treasury yields have to rise – or both. That’s the only way the US government can persuade the world to buy US$3 to $4 trillion of Treasury securities.

US prices are rising and the dollar is worth less in real terms. Bond yields will have to rise to compensate investors for inflation, or the price of US bonds to foreign investors will have to fall with the US currency.

The chart shows the steady decline of foreign holdings of US Treasuries since 2015. The rest of the world dumped Treasuries when they became expensive in currency terms: notably in late 2016 and early 2017, and again during 2019 and early 2020.

After the dollar’s sharp decline during the Covid-19 pandemic, foreign holdings ticked up slightly at the end of 2020 and the beginning of 2021.

US inflation is making things worse. First quarter GDP data released Wednesday morning showed a torrid inflation rate of 4.1% (the consensus of forecasters had expected just 2.3%). That’s an ugly number.

The Fed claims that the recent burst of price increases is a passing response to a recovering economy. When Kentucky Fried Chicken is offering workers a $400 sign-on bonus and McDonald’s pays $50 for anyone who shows up for a job interview, inflation doesn’t look temporary.

Breakdowns in the supply chain, from the collapse of oil drilling in the US to the worsening semiconductor shortage, are building price increases into the pipeline for years.

The worst thing to own right now is US bonds. Yields will have to rise to draw in buyers as the inundation of Treasury issuance proceeds, especially if the US Congress passes the Biden administration’s spending plans – currently coming in at the rate of once a month or so – each of which serves up another couple of trillion dollars of outlays.

Chinese bond yields have been falling as China’s currency appreciates against the dollar. Chinese stocks fell during the first quarter of 2021 after a spectacular run during 2020, as China moved to reduce leverage across the board. The Chinese market now looks attractive.

Some solid European names – for example, the industrial giant Siemens – have performed well and still offer good value. In the US, stocks that benefit from higher yields and a steepening yield curve – for example banks – are likely to ride the inflation wave better than industrials.

Ford Motor Company, suffering from the world semiconductor shortage, was the S&P 100’s worst performer today with a 10% loss. Tech stocks are uncertain; Facebook has done well in the pandemic while Twitter and Netflix reported disappointing revenues.

The watchword for investing is that fear is replacing greed as a market driver. Be afraid. Be very afraid.