The Fed is not in a good spot.
Bond Yields Are a Warning
Bloomberg reports Costliest US Bond Sale Since 2001 Is Investor Warning to Bessent
The US government sold 30-year bonds at the highest interest rate in a quarter century, a testament to investors’ demand for greater compensation to finance the nation’s growing deficit.
The yield at the $25 billion sale Thursday came in at 5.216%, the most since 2001, even as a drop in oil prices supported US debt in secondary-market trading.
“The only clear solution I see, is the US government tightening its budget,” said John Fath, a managing partner at BTG Pactual Asset Management US LLC. “The whole game plan of trying to move issuance up to the front end: You can only do that so much, right? Then it becomes what I would call irresponsible.”
No Comment
Representatives for the Treasury didn’t respond to Bloomberg’s requests for comment.
I would not want to comment either.
30-Year Bond Yield
The Fed didn’t issue 30-year bonds for many years. A recent high of 5.27 percent is the highest since 5.28 percent on July 7, 2006.
US Treasury Yields Percent
Secular Top
On September 1, 1981, the 3-month yield hit 17.01 percent.
On that date, the long bond yield was 14.70 percent, the 10-year yield was 15.41 percent, and the 2-year yield was 16.78 percent.
That was the secular top in interest rates.
Secular Bottom
The secular bottom was March 9, 2020 when the long bond yield fell to a record low 0.99 percent.
On that date the 10-year hit a record low 0.54 percent.
Secular Treasury Yield Headwinds
- US Debt topped $40 trillion
- Deficit spending is massive
- US debt-to-GDP projected to soon hit 123 percent
- Boomer retirements are pressuring Social Security, Medicare, and Medicaid
- Just-in-time manufacturing has ended
- Global wage arbitrage is over
The only major tailwind is AI, assuming the productivity miracle does happen.
Cyclical recessions may tame inflation for a while, but Congressional spending is deeply entrencehed.
Strong Signal
The long bond yield is a strong signal to Kevin Warsh and the Fed that the Fed is behind the curve.
Incompatible Things
- Set an interest rate and defend it, without QE or Interest on reserves, both of which Warsh wants to eliminate.
- I suppose if you “study” the problem long enough you can hope the problem goes away.
If you set an interest rate, you have to defend it. And if it’s too low, you defend it with QE and interest on reserves.
Warsh’s Honeymoon Is Over
The long bond is revolting for many reasons. One of those reasons is the Fed is behind the curve.
The others are debt, deficit, spending projections, tariffs, the war in Iran, money supply that is out of control, and genuinely stupid economic policy by Trump.
The choice for Warsh is to let the market set the Fed Funds rate, or keep QE.
It now takes over $3 trillion on the Fed’s balance sheet to peg rates where the Fed thinks they should be.
Warsh’s statement that the bond market is doing the tightening is very disingenuous in light of his position on ending QE and free money interest to banks.
Warsh is right about ending QE but so far he is unwilling to walk the walk. He wants to study the issue hoping to buy time.
The bond market says time is up.
But hey, don’t worry because Trump Says “I’ll Never Apologize, You’re Just Paying a Tiny Bit More”
Trump just handed the Democrats another midterm election talking point.
Also note Trump’s Trade War With Canada on Verge of Becoming Economically Nasty
A USMCA trade deal breakdown with Canada is increasingly likely.
The best we can hope for regarding USMCA is that things are only mildly stupid.
My self directed brokerage is offering 30 year government bonds issued in 2020 at 1.375% for $47 on the hundred for a yield of 5.30%
Imagine buying these bonds at or near par back in 2020 for your kids university fund and now they are worth less than 1/2. Something you would expect from a third world country.
I know it is just rate differential but it seems unreal.
Corporate bond investors aren’t telling the Fed what the Fed doesn’t already know – long rates have to rise after the midterms. In early 2016, the Fed took their key rate, 10-year Treasury yields, down 40 percent. Once the election was over, the Fed ceased their manipulation and Treasury yields increased full circle. These Treasuries have matured through 2026. The Fed used the principal from matured Treasuries, and their accrued interest, to repurchase Yellen’s Treasuries and keep rates suppressed.
Since the Fed hasn’t been able to pay interest on their acquired Bonds since 2023, the Fed’s own stipulations state they aren’t required to return interest on their balance sheet purchases until the Fed is again whole. The Fed had use of interest on $6T, plus the original principal, for their shenanigans over the last 3 years.
But, once the Fed’s 10-year Treasury purchases from 2016 dry up after November, they will run out of maturing liquidity to keep long rates suppressed. The Fed will have to resort to QE, which they don’t want to acquire additional debt they can’t pay. They can use stealth QE of activist Treasury issuance, that Yellen had devised in 2024, and Bessent recently stated he would consider. The Fed can continue to keep FFR low, and allow risky Bond investors to arbitrage short rates against rising long yields. This would only add to inflation and prolong an equity market at historic high levels of margin debt.
Trump wants zero percent rates, so his buddies can continue to buy up America for 0%. He will get what he wants. All dictators do.
You need one rate for investment in real businesses and a different rate for speculators. This will never happen. The only answer is an economic reset and liquduidation of all assets by the central bank. Keeping up appearances only works for so long.
10 Yr getting up there: 4.726
The funny money is getting funnier everyday. But i’s no laughing matter. What else can you expect when your rulers are corrupt.
Rising bond yields are your saviour, embrace rising bond yields. That is the only thing that can stop the foolishness and the debt super cycle might even survive.
“Secular Bottom”
That’s the mathematical problem. Once a major cycle turns, it heads toward the other extreme, just as the secular top did around 1980. There was a reckoning in 1980, there is a reckoning now.
“Cyclical recessions may tame inflation for a while, but Congressional spending is deeply entrencehed.”
Driven by human nature.
The FOMC made a huge mistake by not hiking short term interest rates by a quarter point at the last meeting, when the 2yr treasury bonds were screaming to do so. As a result, in the long term bond markets, the beatings will continue until morale improves.
The fed has influenced rates too low since Volker left the fed. Its foolish misguided ever lowering rates coupled later with QE policy lent support to Nixon’s removal of dollar convertibility to gold. Without free market determined interest rates and the discipline of gold on printing dollars, congress has borrowed and spent the country into a situation similar to debtor’s prison.
We have reached the end of the irresponsible monetary and fiscal road where the market forces now dominate. The fed cannot monetize the debt faster than inflation destroys the dollar. Mish proved this with his post:
How Much Credit Growth Does It Take to Expand Real GDP? – MishTalk
The fed cannot keep rates low without inflationary policy actions. In my opinion, the natural course correction the free market would inflict on our economy is a very deep recession or potentially depression until congress got its poop in a group, but the fed will try to avoid the inevitable with huge stimulus and congress will feel the need to do what they did in the covid fiasco, spend even more of what they do not have. I think that can has been kicked to the cul-de-sac curb. Market participants will see it for what it is and require compensation for an eroding dollar in the form of increased yield or just not lend to the government putting more pressure on the fed.
The sad part is our country has been essentially in this same situation after WW1 and the Spanish flu pandemic and following WW2. Both times federal spending was drastically cut and both times we got economic prosperity within a relatively short time frame. It should also be noted that the cuts adversely hit the economy right after implementation, but it was short lived, measured in months not years.
In short, it was government getting out of the way of the free market, letting wealth generating ventures grow and contribute to the general economy. Government programs disproportionately go to wealth consuming programs contributing the underfunding wealth generation. Reminds me of President Reagan’s famous quote, ” I’m from the government and I’m here to help.”
Congress has done more harm to children with borrowing and debt than Epstein could ever dream of. And since we are responsible for what Congress does, we all end up being child abusers.
There is a lack of buffering ability in the system to absorb shocks, such as an AI stock price correction:
… “The more severe scenario is not the equity correction on its own but a correction that coincides with broader market instability that policymakers cannot easily calm: unlike in the dot-com episode, today’s starting point leaves markedly less room to cut interest rates or use fiscal policy to cushion the fallout,” the [ECB] blog said. …
https://www.reuters.com/business/autos-transportation/ai-market-correction-is-coming-ecb-blog-predicts-2026-08-17/
Instead of doing something about the exploding federal deficit, Trump is spending his time shitifying Washington DC. At the same time, soaring AI investment adds to the upward pressure on long-term rates. In this setting, Warsh’s preference to “sit” on the nominal short-term rate as long possible will at some point dislodge inflation expectations. At that point, the Fed will find itself back in the 1970s, but with a fiscal crisis to boot.
My readings this weekend suggest the CME fedwatch tool is not being taken seriously. Many pundits now believe that the Fed will not raise at all this year. I hear arguments that the Fed won’t raise near an election and that if the Fed was going to raise it would have done so already.
I suspect much of the stock market believes the rise in bond yields is actually growth and not the result of a short term supply side shock. Hence equities will continue up using this logic as well as the belief that Trump will not allow the market to go down before an election (good bet the market is rigged, just imagine the US Treasury hooked up to S$P futures. Bond market knows this.)
My guess is that worst of the oil shock is yet to come hence it makes it hard for me to go overweight gold. But higher yields mean Bessant is closer to starting yield curve control, which is what Trump really wants.
So many Headlines; so many ‘causes’
After 40 years of declining interest rates …
What if we’re in for 40 years of rising interest rates ?
Summer & Winter
Trends come in long and short term cycles that tend to repeat.
Long-term low interest rates cause distortions that can only be solved by long-term high interest rates. And vice-versa.
15 years remain on the 60 year interest rate cycle. This cycle is +/-1 year going back to the time George Washington was President.
So you mean 120 years, 60 years up and 60 years down ?
Current cycle is affected by central bank interventions and longer life expectancy, as well as demographic bulge ?
No, 60 years between historical peaks. Not all cycles are perfectly sinusoidal. Many become U or n shaped.
The recent 40 day cycle low for the 30 yr bond rate had almost no pullback. It’s right-translated, so that means longer cycles are very strong to the upside.
Trump got rid of Powell because he wouldn’t cut interest rates, so do you think that Warsh will raise rates, especially right before the midterms?
Bombing the S**T out of people and starting wars appears to be an old playbook when your currency is dying.
“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.” – E. Hemingway
face in the crowd, is a must view classic movie. andy griffith first film. stars as a wino and grifter who becomes potus. i need to watch it again. has been ages.
It bears repeating:
I can take any wino off the street and make that wino look like a financial wizard, as long as said wino can continue to borrow and refinance.
The United States is that wino.
After Doge we are going into debt even faster.
That’s an impressive feat
In its latest report, the Treasury tells us that between July and September alone, the government expects to borrow an additional $739 billion!
You know an economy must be doing swimmingly well when the govt must borrow nearly 3/4 a trillion $s/quarter to stay afloat.
Not to worry, the massive trade deficit provides plenty of treasury demand. A current factor is the demise of European socialism, capital flows from Europe end up in US market investments. Interest rates have a downward bias despite US fiscal profligacy and inflation.
“demise of European socialism” – you must like Foxing your information
Please read the news. Germany admitted the pensions and welfare can’t be paid. European pension funds are drained as the quality-of-life collapses in Germany, Britain and France (got air conditioning). Capitalism builds, socialism destroys.
Yes read the news Melvin. The US is $40+ trillion in debt on track to be $50 trillion by the time Trump leaves office. Social security insolvent. Medicare insolvent. $1+ trillion in CRE debt, $1 trillion in student loans, $1 trillion in credit card debt, trillions in mortgage debt.
US capitalism isn’t building anything but mountains of unpayable debt.
I’m still able to remember when a Balanced Budget Amendment was still open for debate. It was our last chance and we let it slip through our fingers. I’ll be in my bunker when The S— Hits the Fan.
Total nonsense, granted the US fiscal situation is a mess but it doesn’t have anything to do with capital outflows.. There are massive outflows of capital from the Eurozone to the US. Apparently, you missed the rotation from UK, Germany, Switzerland into the US. Eurozone funds are heading for the exit and it’s benefiting large cap US funds. Even high yield Euro bonds are experiencing an exit of capital. The US is meeting its obligations but the eurozone is not able to pay the extensive welfare. Look for Eurozone capital controls given the dire situation with Euro socialism.
You’re in denial. The US just tried to bailout their biggest lender, Japan, because once Japan goes so does US “capitalism” and the lending money spigot.
It will happen eventually, Japan, will stop buying US treasuries then you will see reality.
Last time I checked, it takes $1.16 to buy 1 euro. Think on that for a while if you’re capable.
The europeans are simply shifting moneys from public spending to warfare. Both are forms of socialism.
Compare yields on german Bunds to Treasuries of comparable tenor.
No, they are shifting out of the eurozone to the US. Some might say they want war to bail out their failed socialist economies with war, hence military spending. It’s hot today and I’m enjoying my capitalist air condition while French socialists cook.
When the United States of America elects a total imbecile, it destroys. The EU will be fine once it starts making trade agreements with communist China.
The US has already elected and imbecile.
So where are the bond rating agencies in all this? The market is screaming that these bonds are basically single A+. Trump would label S & P as traitors if they tried to be honest about the situation. $40T in debt and increasing at $2T a year. With a government that is effectively deadlocked on making any decisions, an administration fixated on ballrooms, decorations, and war, and an electorate so adverse to taxation that it will kick out good fiscal management (if such an option was even available) in favour of corruption and low taxes,
Good luck!
The credit agencies are probably being blackmailed to toe the line. Just like anybody else in power.
Been there, done that.
“Credit rating agency claims Justice Department lawsuit was a revenge move for US credit rating downgrade in August 2011”
https://www.theguardian.com/business/2013/sep/04/standard-poors-us-retaliation-lawsuit
The Fed is screwed. We already had way too much government spending which is now exacerbated by the stupid war in Iran, funding Ukraine, and other recent follies. The biggest thing I am surprised at, is how long this charade of financing gov’t debt has gone on without an implosion. I think a massive reckoning will be forced upon us within the next couple of years and it won’t be pretty. The gov’t is unwilling to make the hard choices to rectify an unsustainable funding situation. Hard times ahead (IMHO).
Well, the culture is imploding. Gambling, endless Coliseum like events, mass daughters pimping themselves on sex sites, school shootings are in vogue, and don’t forget we have endless commercials for Soma, err I mean happy drugs, because our culture is completely miserable and nihilistic.
This all a recipe for interesting times. The shoe will fall on the other foot. We American can only kill so many hundreds of millions of other humans in wars of aggression without any just war theory, that are turn in the grinder must come.
A murderous evil egomaniacal nation can only prosper so long before it collapses. At least our stock market will reach even greater highs before the collapse happens.
Someday capitalism will be studied in history books like we look at the dark ages.. What we’re we thinking.. Self interest solves all problems? (game theory disproves this..)
But selfishness/selflessness are not a binary, but a fuzzy continuum. How much is enough of each?
In a fragmented society like this, there are all kinds of paths and outcomes. Some are living their best lives, right next to collapsing ones. I see it before my eyes every day. Some imbalance is unavoidable n anything posited as a “free” country. I own my choices and outcomes, good or bad. But I will concede the balance is out of line now, in a widespread and troubled way.
It is perfectly fitting that this sick, demented society elects a pedophile and serial rapist as its leader. Now this diaper wearing octogenarian is leading them into complete destruction. His MAGA cult members will live the rest of their worthless lives living in cardboard boxes under highway overpasses. A nation of white trash scum led by the king of white trash scum.
You must have been reading Mauldin.
https://www.mauldineconomics.com/frontlinethoughts/caught-in-a-debt-trap?_sc=OTQzMjQwNSMyMTQwNDM%3D
You have to admire in a dark way how well they keep the balls in the air.
Banks don’t lend deposits. The FDIC needs to drop deposit insurance back down to 100,000.
Why should there be any Government insurance. People should be aware of the solvency of the banks they trust.
Essentially correct.
But my solution is the correct one. Deposits should be parked at the Fed not used by banks to make speculative bets on yields. Banks don’t lend deposits, deposits are the result of loans. But if those deposits are force parked at the fed, there is no need for FDIC. It is de facto guaranteed in unlimited amounts.
glass steagall act was good for most. for all my wall street pals i grew up with in new york, abolishing it under clinton was a license to rob cheat and steal even more. panic of 2008, foreclose on middlebrows and bail out the brooks brothers boys…………
“Banks don’t lend deposits…”
“Deposits should be parked at the Fed not used by banks to make speculative bets on yields.”
Where are these banks getting money to make speculative bets on yields, if they aren’t lending deposits?
And get rid of fractional lending .
How would regular individuals have any realistic idea of how solvent an individual bank is generally, much less month-to-month when their needed money stays there?
Do you think every pill-popper in America should be aware (without government oversight/insurance) of the ingredient mixing of every pharmaceutical factory making their pills?
The banks will lie about their solvency to the people.
This was rampant during the “free banking” era of the 19th century.
If you want people to stash their money under mattresses, sure. Of course, that money is lost to the productive economy while it sits under your blankets.
FDIC insurance means that you can put your money in a federally-insured bank without having to check its credit rating every day in case there is a run on the bank while you are at lunch or something.
Bankers want FDIC insurance, they don’t want to be Mangione’d while walking down the street. I was a long distance mover in the early 80’s and we moved an S&L president from Seattle to (an undisclosed location) He was using an assumed name and wanted to change the destination address just before delivery without any notation on the bill of lading. Paid cash, gave us a nice tip!
Getting rid of guidance is one thing. Replacing it with _nothing_ is crazy as the market will read your tone, your tertiary actions etc in ways you won’t anticipate and won’t like.
Setting up long-term study committees seems a way to defer actually taking any significant action, which is a second way you are increasing market’s volatile instincts.
The rest of the FOMC may have to be more public and be more bearish to compensate for what seems to be a faux-bear chairman.
Mish the market just wants to see the 30yr futures trade at par again 😉
I would support a reduction in social spending – the minute after “defense” spending is cut in half.
Using a budget tool, Mish once stated he was able to balance the budget. I assume he did so with a massive reduction in defense….
It’s not defense anymore. It’s the Department of War.
IKR? That’s why I put it in quotation marks. Trump started a war against a distant country that did nothing to us and posed us no risk. Of course, the same could be said for prior wars.
No, that is the prerogative of Congress.
What Hegseth says, or Trump says (Trump Strait, Gulf of America) all mean nothing.
Warfighting or warfighters instead of soldiers and battle/war — it’s all transparent reframing. Don’t fall for it. Shun it all.
You want to “cut in half” from what level? From last year’s $1T level? Or this year’s $1.5T level? Or next year’s $2T level?
I’d cut it from Fiscal 2024. I’m not laying awake worrying about Iran, Iraq and one of those Koreas.
I read “…The only major tailwind is AI, assuming the productivity miracle does happen.” and wonder how mass unemployment would help.
How would “the productivity miracle” help the FED?
(what am I missing?)
GDP growth hypothetically lets you grow the economy faster than the debt (supposedly).
growing GDP -> growing company profits + wages -> Increased tax collection?
Why didn’t the US refinance the debt on long term treasuries during 2020?
The then-existing debt had a set duration. We would have had to pay far above the face value for to retire it if that were even legal. It’s not like a mortgage without a prepayment penalty. Also – and more importantly- 0% short term debt was cheaper in than .99% debt. Plus we would have had to pay a lot more than .99% if we’d tried to shift it all to the long bond.
1) because the then-existing debt had a specific, legal duration. It’s not like a mortgage. If it were even legal to pay it off early, it would have required paying it off at well over 100% of face value, 2) because trying to finance the entire debt and deficit on 30 year bonds would have pushed rates on those bonds to the moon and 3) because we preferred 0% debt even to .99% debt.
If something can’t go forever it won’t . We are coming to an inflection point without a good choice. Like the Woody Alan quote “More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly. The fed will resort to pegging interest rates at a low level and buying all the bonds, ie qe. I cannot see any other option. They did this after WW2 until 1951. It will result in inflation and a depreciating dollar. The problem most of the world also has the same problem and it will be interesting to see how this plays out. Most other options are less desireable and more painful
Extinction would be good for us.
It won’t, but it can go as far as destroying all wealth in its course.
From what I have read about spendthrift regimes, the American Government still has some tricks up its sleeve. Capital controls can keep money from leaving the country, laws can require people to put their superannuation and perhaps other savings in government bonds, a value-added tax can be imposed (we already have one in Australia – it is called the GST (goods and services tax)), the dollar can be allowed to fall on foreign exchange markets (making manufacturing at home more competitive). Government has the arms and the police: it can make people do what it wants. Remember that government also has a monopoly on fraud: it can require you to believe what it wants you to believe.
If Japan sells US Treasuries to defend the Yen, things will get even worse.
That’s why Bessent sold Euros. Take that, “allies”!
I think you might have misspelled “bitches”.
lol. The Europeons are like battered wives. Stupid Finlanders think joining NATO “protects” them. We don’t protect anybody. Article Five schmarticle five.
Europeans like being slaves.
They wont forget ‘backdoors’ treachery in a hurry. 🙂
Exactly…lets see what the ECB does next time USD is under pressure….
Europeans like being catamites.
Bessent another fucking Trump genius. You can tell a weak leader by the weak people he employs.
It’s a (so far) slow-motion run on the bank. Finally an irresistible force appears on the horizon to answer Trump’s (and the USA’s longer term) follies. I was comfortable for a long time nudging this off into the future mentally. This article finally tipped something in mind.
“The whole game plan of trying to move issuance up to the front end” could only be a stopgap move, pending some solutions coming into place, and reasonably quickly. Instead we got the claimed “solutions” of Trump’s trade wars, Iran war, etc. These are aimed at extremely remote horizons (Trump’s “vision thing,” to quote the elder Bush, or “silly dreamy pie-in-the-sky sales pitches,” to quote me). Bessent and so many others bent the knee to this.
Rest assured, cuts will continue to be aimed at the least connected in politics: individuals and families. The Trump era narrowed and corrupted the in-groups, with their life boats. Grandiose dreams must continue to be fed by this unstoppable machine. Unstoppable, until it too hits its wall.
And the only way that AI can create all of the anticipated productivity gains is through unemployment and disenfranchisement of the upper middle class.
When their investment accounts get gutted, spending ill crash and tax revenues will fall commensurately.
The bursting of the AI bubble will be epic!
Meanwhile, crude oil is above $85 and China is building out its solar powered grid. Leaving internal combustion engines to the dustbin of history where they belong.