“Die gas pumper!”
References to The Jerk are a staple in these pages, even as I realize a lot of younger readers aren’t familiar. If that’s you (i.e., if you haven’t seen The Jerk), do yourself a favor. To call the film a classic is to do it a disservice. It’s among the greatest comedies ever made.
There’s a sense in which the long-end of the US Treasury curve’s a victim of circumstance. Investors don’t “hate these bonds,” they’re just nervous about the fiscal trajectory of the government which issues them, and also about the long odds of fiscal reform given the hopelessly fractious domestic political environment in the US.
You could argue that’s splitting hairs (or a distinction without a difference) given that a bond’s market price is nothing if not a referendum on the issuer’s fundamentals, but Treasurys are a bit of a special case.
In any event, when you add in an economy prone to overheating and a Fed seemingly awake to the possibility that 100bps of rate cuts in three months was overdoing it when growth’s still running ~3%, unemployment’s low and core inflation’s high, the stage is set for the vigilantes to take pot shots at the belly on out.
After hitting the highest levels since November of 2023 on Monday, 30-year US yields rose further Tuesday, hitting 4.92% at one juncture, while benchmark 10-year yields were 4.70%.
As the figure shows, that’s the highest on 10s since April, when markets last fretted over a rekindled US inflation impulse.
There was no “one” catalyst for Tuesday’s move (which bear-steepened the curve), but a 22-month high reading on ISM’s gauge of services sector prices paid certainly didn’t help. The market’s also tasked with underwriting this week’s supply on a compressed auction schedule (due to Thursday’s holiday) at a time when the IG slate’s (seasonally) heavy.
Whatever the case, bonds are out of favor, and while it might be tempting to buy them on the cheap as a hard landing hedge (recent cheapening would theoretically mean super-sized price gains in the event the US economy suddenly rolls over), that’s been a falling knife.
“The siren song of owning duration for a hard landing that never comes has been a painful trade against a backdrop where US data has remained generally front-footed with no signs of anything close to recession, especially with the investor perception of pro-growth Trump policy ‘animal spirits’ waiting in the wings and inflation staying dangerously ‘sticky,'” Nomura’s Charlie McElligott said Tuesday, adding that the Fed’s 50bps “kick-off cut” now looks, to some, like a policy mistake.
Earlier this week, Morgan Stanley’s Mike Wilson said rates are the most important factor for stocks this month, the implication (it was more than an implication as Wilson spelled it out quite explicitly) being that if long-end yields keep rising, stocks will succumb. That was certainly Tuesday’s zeitgeist.
It still beggars belief that there won’t eventually be some payback economically for the most aggressive Fed hiking cycle in a generation. The question, though, is whether, due to structural macro factors, perceptions of fiscal folly and a shifting buyer base for Treasurys (i.e, from price-agnostic buyers to more price-sensitive investors), duration simply isn’t the way to play (for) it.
“Even as the market has reset 2025 Fed cut probabilities powerfully lower with now only a miserly ~40bps of implied cuts remaining across the next 1.5-year distribution, it’s difficult to argue with the view that (back) Red- and Green- SOFR upside is probably the best long around from a risk / reward perspective,” McElligott went on, in the same Tuesday note. “Especially as they help to hedge out some of the beaucoup long equities exposure for the multi-asset real money set, if and when the eventual payback from ‘high-for-longer’ hits the economy looking out beyond 2025 and instead, further into 2026.”
Of course, that trade — straightforward as it is for anyone with any amount of professional trading experience — isn’t on the radar for “everyday” investors, and I’d anyway bet duration demand (dip-buying) will materialize in the event benchmark US yields were to retrace back above 5%, which is to say if 10s revisit the cycle highs.
Thx. Ties in well your Minsky Moment article and future manifestations of trumpian chaos.
My theory regarding societal breakdown can be traced back to the decline of phonebooks. It used to be that you’d strive to get your name in the phonebook and you knew you were somebody when it happened. Now, everyone can just pay for a blue checkmark.
As for bonds, this is a classic “George Costanza/do the opposite” situation where my instincts said bonds were the right play prior to the election.
“My name is dayjob. I’m unemployed and live with my parents.”
The US is somewhat dependent on foreign buying of our treasuries, unless we go full MMT.
Once DJT gets going with some of his crazier antics, will they start to ponder potential repayment risk? US entities don’t face that, but in his first term, DJT was reported to have asked his Advisors if the US could selectively default on bonds held by the Chinese. Might he ressurect that idea and use it alongside tariffs as an instrument of power?
What’s that old quip “If you owe a bank a small amount, they own you. But if you owe them a lot, you own them?”
Trump learned and used that in his business career. Perhaps he will try and use that strategy against foreign “suckers” who bought our bonds?
In regard to MMT, surely if you create more money, you create more inflation . Is there a way to create money without creating inflation as we already have an inflation problem.
Remember: MMT isn’t prescriptive. It’s descriptive. It’s just a description of how government spending in advanced, hard currency-issuing economies already works. This is quite possibly the least-understood macro topic of the 2020s. Governments spend first and “pay for it” later. Or not at all. MMT isn’t a “theory.” It’s just the way things already work. I long ago gave up pounding this table, though. Life’s too short.
I’d go a step further and say that it works that way only to the point that the “shared illusion of value” you’ve spoken about is maintained. Once faith starts to weaken a bit (i.e. even a slight derating, lesser demand for issuance, etc) the same things that were true today may no longer be true in the future. Just look at stock/bond correlations as an example of how “it is until it isn’t”.
I wholeheartedly agree with your statement that MMT is a description of the way things are, not some prescriptive policy playbook. I guess what I’m driving at here is that I wonder how violent/sharp the unwinding is when the laws of market physics that we’ve been relying on suddenly change. It happens regularly with all kinds of shorter-term correlations/truisms/etc. But this one seems like a much higher order change if it occurs.
Yeah, I mean I guess I just wonder how so many people don’t understand the basic tenets here. Plainly, the money has no intrinsic value. This is what makes the hoarding of it past a certain point nonsensical. If you have everything you need and want, and you have enough to ensure that your children will have everything they need and want, and you don’t have designs on anything beyond that, hoarding paper money (or digitized paper money in the internet era) is completely pointless. Particularly considering humans have a penchant for up and dying all of a sudden. What sense, I used to wonder of my neighbors, when I lived on the island, does it make for someone who owns a $10 million beach home free and clear, and has $10 million more in the bank, and is 60 years old, to keep hoarding scrip? I wanted to just shout at them: “Jesus Christ, just spend it! You have plenty and you could die literally today!”
H-Man, I am in the 5+ camp in 1Q25.