Benchmark US yields were 4.80% or so on January 13. On Tuesday, following another lackluster read on consumer confidence, they were 4.31%.
So, that’s a 50bps rally in the space of six weeks, and although the S&P’s higher versus the YTD lows on January 10, US equities are barely positive for the year and lower for February, a month during which 20-years and out Treasurys are on track for a ~4% gain, the long-end’s best monthly showing since December of 2023.
What does that tell you? What does it say about the catalyst for the bond rally when the equity-rates correlation’s positive again? As discussed here earlier this week, it suggests the bid for bonds is attributable not to a suddenly sunnier view of America’s fiscal trajectory in light of Elon Musk’s efforts to right the ship through mass layoffs, but rather to a decidedly cloudier view of America’s growth prospects in consideration of those same job cuts and other pillars of the “Trump 2.0” policy mix.
There’s the chart. As you can see, 4.31%’s a YTD low for yields, which are now through their 100-day.
Part of this is tariff uncertainty, which Donald Trump’s keen to stoke, although the world should be wise to the charade by now: He takes what Wall Street will give him, which is to say he assesses “too far” with regard to trade escalations by way of US equity prices. If stocks fall too far, too fast, he tends to dial down the rhetoric, and when stocks are buoyant, he dials it back up.
(An enterprising Canada, for example, might consider calling Trump’s bluff. Wait until US stocks are back-footed and when he moves to “pause” or “postpone” tariffs, say, “You know what? We’re gonna go ahead with ours. Tariffs on US goods start tomorrow, regardless of what you do.” They have cause. After all, as foreign minister Melanie Joly gently reminded Americans on Monday, “The US is a net exporter of fentanyl to Canada, a net exporter of illegal guns to Canada and a net exporter of illegal migrants to Canada.”)
Bonds also got a fillip from Scott Bessent’s reassurances around Treasury’s issuance strategy. Following a long-end friendly QRA, Bessent reiterated that auction sizes will remain stable for the foreseeable future. That keeps the supply side of the supply-demand equation bullish, or at least stable.
Another part of the bond rally’s just the incoming data, which has rolled over rather quickly. It’s far too soon to declare momentum lost, but another few updates like last week’s flash read on services sector activity and Tuesday’s Conference Board release, and The White House will have a slowdown on its hands.
A third catalyst for the bond rally is indeed Musk and DOGE, but not (not, not) because investors believe the cost-cutting story. Rather, because of the signal D.C. layoffs send, and the read-through of those job cuts for federal contractors.
The chart just shows D.C. jobless claims. They’re rising. “Washington D.C. is now in recession,” BofA’s Michael Hartnett declared, adding that “populists love smaller government.” (That latter contention about populists and small government isn’t true, not even a little bit, but… well what can you do? Facts have no place in America anymore.)
I implore readers: Exercise some common sense. No one’s buying bonds because they think Musk and three twenty-year-olds are going to do what no Congress and no president since the late 90s has been able to do (i.e., put America’s fiscal house in order). Maybe Hartnett’s “buying” bonds on that, which is to say he’s writing about buying bonds, but he’s alone. Everyone else who’s buying bonds (or writing about buying them) on DOGE is buying because they can draw a straight line between job cuts, economic uncertainty and the domestic macro outlook.
This isn’t complicated. Really it isn’t. And no, you don’t have to look through partisan lenses to see it. “Investors have become increasingly wary of the economic downside risks associated with DOGE-related jobs cuts,” BMO’s Ian Lyngen, one of the most staid, businesslike voices in the macrosphere, wrote Tuesday, adding that “even though DOGE cuts aren’t expected to have a dramatic impact on the unemployment rate in the near-term, expectations for increased layoffs and natural attrition have left economists wary of a higher-than-expected UNR in the coming quarters.”
Any questions?
The other problem is the multiplier effect. DOGE cuts= perhaps 300k federal direct jobs+700k contractors. Then add the cutbacks to downstream providers and state and local cutbacks then add in the multiplier from all this. Now you are talking maybe 3,000,000 jobs and a significant drag on confidence and GDP. We will get low inflation perhaps but as my friend Dan used to say, “it will cost ya”!
I notice all the happy talk is melting away. Remember the Trump trade???
Maybe it’s already starting?? Check put DNUT today. What’s next? Not Cracker Barrel, I hope.
I know quite a few federal employees. Everyone I know and everyone they are talking to who hasn’t lost a job is cutting all discretionary spending fearing they could be next. Watch consumer spending in the coming months..
I don’t work for the government directly, but I’m in a tangential industry and I have cut spending to necessities only with only the smallest of indulgences given my means. I want as much cash cushion as I can get to weather whatever is coming. My friends in non-government industries are acting similarly. All of this uncertainty is going to have a persistent negative effect on sentiment and spending.
H-Man, this market seems to be looking for any reason to go lower while bonds are providing (the usual) safety net. If PCE is hot on Friday, bonds will start that march to 5% notwithstanding how ugly it may get with equities with a budget resolution seeming unlikely.
And I think it’s not just the job losses. It’s also throwing buckets of sand into the gears of the entire economy – the wasted time and money of delays, turnover, phone calls, meetings. But of course attorneys, consultants and lobbyists all remain firmly on the boil in this sort of environment, siphoning away even more resources from more productive uses. Something tells me February’s numbers ain’t gonna look too cheery.
You cannot control the outcome of adding force in one area of a highly complex system. You guess and hope.You remove (without much thought about who) 1 million people (maybe 20% of federal employees in the executive branch) and you really have no idea what will happen. I don’t think chaos theory even helps. This approach only appeals to stable geniuses, those who think they are smarter than everyone else and those who have enough wealth that they think they can escape to mars. Tulsi Gabbard is now in charge of US offensive cyber espionage. Think she’s up to the task? Think that might have an effect on markets if she’s not? The bench behind her doesn’t inspire much hope from a substitution.
This reminds me of a concept I learned back in B-School: the “Big Bath.”
When a new CEO takes over at a struggling company (or even a healthy company), they’ll often make the strategic decision to take the big bath: one really terrible quarter where they pull forward every expense they can and write off every under performing asset possible. Since it’s their first quarter on the job, it’s entirely justifiable, no one blames them for a one quarter horrendous loss, and they can blame their predecessor. As a bonus, all future quarters’ earnings will benefit from the reduction in realized expenses, making the new CEO look good.
Trump has something like that kind of leeway for the first few quarters. If the stock market crashes, inflation spirals, unemployment rips, consumer spending craters, he can just blame the Biden administration (I mean, he’ll do that anyway. He blamed Obama for anything that went wrong for 4 solid years. It’s just that it’ll be more plausible for his first 6-12 months in office). After any kind of initial economic malaise (or market sell off), he can claim credit for any rebound from the new lower baseline, asserting he has made America great again, regardless of whether (or how long) it takes to regain the lost ground.
Surely at least a few of the people around him are aware of the impact his new policies will have. Whether they’re brave enough to tell Trump to his face is an open question, but regardless, it seems like everyone around him is more than willing to take the damage to the economy in order to usher in the brave new world they have envisioned.
Blaming Biden isn’t going to work, because Trump will have bragged loudly and endlessly about precisely the actions that people will blame their misery on – tariffs, Medicaid/other cuts, layoffs, deportations. He will own the coming recession, lock stock and barrel.
Well here on Feb 27th close, the SPX YTD performance is RED. Who’d thought that would happen in America’s stock exceptionalism?