It was rough out there for investors this week. Again.
It’s not a coincidence that the worst three-week stretch for US stocks and bonds since “Liberation Day” (longer for bonds, depending on what index you’re using) happened to coincide with three weeks of all-out war in the Mideast.
War hawks in D.C. and Israel have made monetary hawks of central bankers, some of whom would rather be doves.
Treasury yields were higher across the curve into the US afternoon on Friday. The 20-year — an eccentric security — flirted with a five-handle.
Speaking of five-handles, 10-year UK yields were 5.02%, as gilts extended Thursday’s BoE-driven selloff. If you’re keeping score at home, that’s 70bps on benchmark UK borrowing costs since the onset of the war.
The only comparable episode in recent memory is the Liz Truss debacle, which was so anomalous it almost doesn’t count (congratulations to Liz on being an outlier even as outliers go).
As I was at pains to emphasize this week (BoE decisions don’t tend to garner a lot of reader interest), the UK had it worst among major advanced economies during the previous two supply shocks (i.e., the pandemic and the war in Ukraine).
That experience, and the attendant blow to the BoE’s reputation, meant the MPC was guaranteed to exhibit hyper-sensitivity to the prospect of another energy shock. The March policy statement, then, was sure to make for a stark contrast with February’s dovish communications, opening the door to a dramatic repricing across the UK rates complex. And here we are.
This week’s “gilt trip,” if you will, unavoidably spilled over into US rates, which had anyway already caught the flu from Europe. 10-year Treasury yields were ~40bps higher for the month through noon on Friday.
As the figure shows, we’re now looking at the worst in-tandem selloff for US stocks and long-end Treasurys since April of 2024.
Notwithstanding Friday’s session, the rates selloff is a bear flattener. The 2s10s was ~73bps at the beginning of last month. It’s ~44bps now.
As BMO’s Ian Lyngen noted, “the two-year sector has become unmoored from effective Fed funds” which is no longer “an anchor” for the front-end.
The chart’s a reminder of just how dramatic the STIR repricing is. On Friday, markets were pricing even odds of a Fed hike through the October meeting.
Rather than employing the declarative, I’ll pose it as a question: Does that seem overdone to you? Because to me it does. That, more than anything, speaks to why I suspect Donald Trump will wind down military operations against Iran sooner rather than later.
Trump’s dead set on rate cuts. He’s not going to countenance a scenario where a Fed he’s worked so hard to commandeer not only fails to lower rates, but in fact raises them.
Think about the effort he’s put into the Fed gambit. He tried to fire a board member on ginned up mortgage fraud charges in a case that ultimately ended up before the Supreme Court. Then his surrogates subpoenaed Jerome Powell for allegedly lying to Congress about the cost of renovations at the Eccles building.
Neither of those gambits are likely to succeed, but the point is, he’s heavily invested and determined to claim for himself as much in the way of sway over US monetary policy as it’s possible to command without a mutiny from GOP senators. The war jeopardizes that project. US twos at ~3.90% are almost surely oversold looking out over a medium-term horizon.
Of course, in the very near-term, all bets are off, as evidenced by reports that Trump might be pondering a takeover of Kharg Island, which he bombed last weekend. That wouldn’t happen immediately, but could be on the cards by this time next month if the Strait isn’t clear to through traffic.
“He wants Hormuz open. If he has to take Kharg Island, that’s going to happen,” an administration official who spoke to Axios said.
Another source quoted in the same article delineated a timeline and described Trump’s thinking. “We need about a month to weaken the Iranians more with strikes,” the person said. “Then [we’d] take the island, get them by the balls and use it for negotiations.”
In Trump’s warped mind the notion he has a month to break the backs of the enemy before negotiating is no good. Who’s he going to talk to? Nobody’s left alive.
Kharg Island, is very far from the choke point, at the Straight of Hormuz.
I’m no military expert, but it’s difficult to see what value, if any, Kharg Island gives.
If the goal is to deny Iran, the ability to export oil, then Trump Is doing the opposite — he seems to be going out of his way to ensure that they can export oil.
So what is the point of Kharg Island, other than to embarrass Iran?
There’s a link about bombing Kharg Island. It’s right there in the article. Would have saved you four paragraphs.
In fairness, the article doesn’t really do a good job of answering the question. It’s an Axios article after all, not Foreign Affairs.
Taking Kharg serves the dual purpose of further tightening Tehran’s finances and serving as a bargaining chip in negotiations.
It would also satiate Trump’s bloodlust. Tehran’s failure to capitulate must be doing significant harm to Trump’s ego, taking Iran’s economic crown jewel is exactly the kind of lashing out Trump would countenance.
All that said, I think this is a feint and the Marines land on Qeshm.
Whoever is “next in line” from the IRGC will keep getting taken out by Israel until such time that an IRGC leader surfaces who can both raise support from within the IRGC and make nice with the USA (the equivalent of Delcy Rodriguez).
Shutting off oil shipments to China and India will eventually financially harm the IRGC (they need to sell oil to get cash in order to pay their armed forces) and force the IRGC to negotiate with the USA. This can’t happen overnight.
Oil is a global commodity so “shutting off” oil shipments to China and India in an attempt to “eventually financially harm” the IRGC would crush our economy first. That’s how that works.
The oil price transmission to the US is a lot faster than “eventually”.
For example, you are right now seeing Brent, WTI, US gasoline and diesel prices chasing Asia crude oil prices higher and higher. An oil shortage in Asia does not stay limited to Asia for more than a couple weeks.
I know I had mentioned Kharg before, but my money is on Qeshm island now.
Off topic: I really liked the “Sea Lion” cartoon you linked the other day. Thanks for sharing that.
Longer-term (let’s call it medium-term) I think interest rates will depend on the extent any second and third order effects of higher-priced oil (let’s say anything over $85 a bbl.) add to or sustain inflation. Fertilizer, petrochemicals, plastics, transportation costs, etc. Anything that creates or prolongs interest rates at or above 5% would be problematic. All that would take is an escalation, an ineffective ground offensive, or a few successful strikes against ships in the Strait of Hormuz. (For example, what if Iran had succeeded in hitting some of our aircraft at Diego Garcia today?)
Iran will never surrender. It’s a strategic misread of the Persian psyche by the US warlords. I’m no war export, but isn’t the first rule to understand your enemy.