"Treasury Yields Go Nuts, Oil Goes Nuts,
War Goes Nuts. Republican Convention Goes Bonkers"
by David Haggith
Excerpt: "Treasury yields took a rocket ride skyward today in another spectacular Bessent fail after all of his smug talk. Perhaps the more he plays his lame games the more the bond vigilantes will beat him up for it to show him who’s boss. Suddenly the US10YR is tickling the underside of 5% (which, of course, sent stocks down): The Treasury market’s painful rout intensified Thursday, as a fresh auction of 30-year U.S. government debt and Treasury Secretary Scott Bessent’s first beefed-up buyback operation failed to calm the market.
The tumult comes [as] oil prices jolt higher and inflation data increased the odds of a Federal Reserve interest-rate hike next week. That combination had the benchmark 10-year Treasury yield up 12 basis points to 4.96% - its highest level in about three years, and putting it in jeopardy of hitting the 5% threshold. “Everybody is selling everything,” said Tom di Galoma, a managing director at Mischler Financial Group
This huge spike in yields happened, as the article mentions, in spite of the fact that Secretary Scott Bessent’s Operation Twist was intended to bring down rates on longterm Treasury bonds ranging from the 10YR up to the 30YR, which, instead, climbed a staircase today to 5.37%! Earlier this week, Bessent dared traders to “bet against me if you want,” while also declaring: “I am the house now.” Well, the house just lost a bundle on that bet, so his chest puffing didn’t get him very far.
Thursday’s reaction “shows the house is the market, not the Treasury,” said Horan at Chilton Trust. The Treasury may be “the big kid on the block” and trying to “draw the line in the sand with the buybacks,” but the market is “bigger than this line in the sand,” he said.
We call that MAJOR bond vigilante action when bond investors beat up the Treasury and/or the Fed and show them who is boss about where yields are going. Today was a head-slammer. So, here is how this likely goes if the Fed doesn’t cooperate by moving its rates to where the bond market is now telling the Treasury interest is going to go:
If the Fed doesn’t hike rates next week, there’s a risk that long-dated Treasury yields could become “unanchored” and more disorderly, said Ed Al-Hussainy, portfolio manager at Columbia Threadneedle. If the Fed and feds know what is good for them, the bond vigilantes have them quivering in their pretty pink and rhinestone cowboy boots:
"Al-Hussainy said the Treasury and the Fed likely will be more concerned about the potential for bond-market tumult to unleash financial stability concerns. He noted that hasn’t happened yet, but it’s something to monitor given Thursday’s violent moves, especially in shorter-dated Treasury yields. That was prompted by rising odds of a Fed rate hike and the leg higher in oil prices."
As the Treasury buys back its longterm bonds to try (very unsuccessfully) to pull down longterm interest rates on the national debt, they raise the money for those buybacks by selling a lot more short-term bonds. The increased supply of short-term bonds on the market naturally lowers the price investors are willing to pay to buy the surplus of short-term bonds. (Simple supply and demand.) When the Treasury gets a lower price for the bonds it is auctioning, that raises the yield on those bonds when they mature and the Treasury pays them off at face value - the effective interest the Treasury ends up paying once any semi-annual coupon interest paid by the Treasury over the years of the bond’s life is added in to the payoff.
So, short-term bonds are experiencing even greater upward yield pressures than longer term bonds, which were supposed to see the payoff of a drop in yields that did the opposite. And that is where the whole mess can get disorderly and see all bond rates take off. After this bruising tumult, you can be sure the Fed and feds are now both monitoring this trouble that suddenly emerged because it shows the bond market no longer has faith in the losing Trump Treasury. Too much game playing, too much jawboning, too much added debt, too much war, raising the price of oil and fuel and, thereby, the price of everything! Speaking of which, how was that inflation?"
Full, most highly recommended article is here:
No comments:
Post a Comment