Bonds are obviously one of the key market stories in August.

Indeed, were it not for China’s multiplying misfortunes, the financial pages would be nothing but bonds spiced, perhaps, with a few obligatory nods to suddenly-struggling equities.

I’ve done my part. Looking back at this week’s coverage, it’s been China and bonds. I’m not complaining. It could be worse. At least this week wasn’t the arduously boring affair it could’ve been given the proximity to Labor Day vacations.

In “The Bonds Are Broken,” I walked through a number of factors that’ve conspired to undercut 2023’s “year of the bond” narrative. If you ask JPMorgan, foreign official selling in defense of weak currencies probably isn’t a factor. “A significant share of official holdings [are] concentrated at the front-end,” Jay Barry noted, adding that just 5% or so of foreign central banks’ Treasury holdings are 20-year and out bonds.

Barry instead placed some of the blame for this month’s selloff with capitulation from duration longs. I’ve been over that and over it, including in the linked Thursday article.

Some readers are doubtlessly sympathetic to the idea that even if Fitch’s downgrade of America’s credit rating was meaningless and even if Treasury’s refunding announcement didn’t contain much in the way of new information, it’d be some coincidence if there’s no relationship between those two events and the ensuing bond selloff.

“As to what’s driving the move, it’s possible that the market has just reassessed the future path of rates and inflation, but it does seem a big coincidence that the current bond selloff started just around the time that the Treasury announced a whole bunch of more borrowing and Fitch downgraded the US,” Bloomberg’s Sebastian Boyd, easily my favorite terminal blogger, wrote Friday.

“Supply is probably the main driver, but it’s also possible that a lot of people, and I include myself, underestimated the scale of forced selling that would result from the second loss of an AAA rating,” Boyd went on, adding that although “few, or no, US-based funds have investment mandates that would force them to dump Treasurys in the event of a downgrade, the scale of the selloff suggests other Treasury buyers around the world may follow less flexible rules.”

As discussed here a week ago, the juxtaposition with never-ending inflows to Treasurys is notable. Looking at the latest flows data, it appears that Treasurys were the only group within US fixed income to see inflows. After 27 straight weeks, Treasurys are on pace for a record annual haul, BofA’s Michael Hartnett reiterated, emphasizing that “global yields keep rising despite massive inflows.”

But it’s not just the flows juxtaposition that sticks out. Hartnett also exhorted investors to consider rising yields in the context of a Fed that’s near the end of its hiking cycle, US headline inflation that’s now six full percentage points off the peak, “all-out” (as SocGen put it) deflation in China and a grinding (if shallow) recession in Europe.

The catalysts for the recent run up in yields, Hartnett wrote, are the US debt ceiling resolution (which “signaled no credit event and more fiscal stimulus”), the BoJ’s YCC tweak last month and the Fitch downgrade. That said, if you want to understand why inflation is elevated, the cost of capital is higher and asset returns are lower in the 2020s, Hartnett said you need to appreciate the “big picture,” where that means understanding the implications of “secular, entrenched” dynamics including low unemployment, newly-empowered labor, higher wages, bigger deficits, larger demands of fiscal policy, geopolitics and oligopolistic commodities.

In a characteristically brilliant introduction to their weekly podcast (which anyone can listen to, by the way) BMO’s Ian Lyngen and Ben Jeffery alluded to the search for a bond selloff culprit. “Risk is a familiar concept on the trading desk — not solely in the DV01 sense, but also as it relates to term premium, Fed policy, economic contours and geopolitical developments,” they wrote. “It’s also the popular 1957 strategy board game that has us pondering who precisely sunk our battleship, are they really Sorry! and the location of our $200… we’ve passed Go after all. It may be too soon to tell, but early signs are pointing to Col. Mustard, with the candlestick, in the billiards room.”