Has anyone checked on breakevens since the election?

That’s a joke. I mean, US rates strategists obviously have, but if your job description doesn’t include a mandate to monitor the decomposition of Treasury yields, the odds you’ve looked at BKEs since last week are about as high as the odds of Donald Trump refraining from conspiracy theories about the election outcome.

It’s always worth checking in on that breakdown, though — the decomposition of UST yields, I mean. Bonds usually have a story to tell, and it’s almost always more sober-minded than whatever histrionic yarn equities are spinning.

With that in mind, have a look at the figure below, which shows you the evolution of breakevens and reals since mid-October, with Election Day marked.

As you can see, the cumulative 26bps decline in nominals since the middle of last month is mostly reals, but from Election Day through the end of election week, breakevens led the rally.

What does that tell you in the context of last week’s chip-stock rout and concerns around the implications of the blue tsunami for the AI equity bubble?

“Real rates led the move toward lower yields during the second half of October [but] following the midterm elections, the Treasury rally was a function of the sharp decline in breakevens,” BMO’s Ian Lyngen wrote. “This suggests that an equity drawdown of significance is being viewed as forward disinflationary — particularly if it’s tied to derailing the AI buildout.”

That’s a simple, but all the same important, observation. As Ian went on to say, spelling it out further for anyone not picking up what he was laying down, “[T]he wealth effect has been propping up consumption and inflation during the latest stage of the cycle, therefore removing this pillar will keep prices contained going forward.”

The figure above’s a reminder: The wealth effect was in full… well, in full effect in Q2, when American households enjoyed a record $10 trillion gain on their stocks.

I’m reminded of Zoltan Pozsar’s modest suggestion in February of 2022, just a month before the Jerome Powell Fed embarked on the most aggressive rate-hiking campaign since “Tall Paul” was in charge of monetary policy.

“Maybe the path to slower services inflation is through lower asset prices,” Zoltan wrote, on the way to sneering (and yes, he’s a smug little guy, and not the fun kind of way that I’m smug): “We recognize that what we are saying is extreme, but we think the Fed will soon incorporate some version of this thought process.”