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 $3 trillion on the Fed’s balance sheet to peg rates where the Fed thinks they should be.
Warsh’s statement that the bond market is doing the tightening is very disingenuous in light of his position on ending QE and free money interest to banks.
Warsh is right about ending QE but so far he is unwilling to walk the walk. He wants to study the issue hoping to buy time.
The bond market says time is up.
But hey, don’t worry because Trump Says “I’ll Never Apologize, You’re Just Paying a Tiny Bit More”
Trump just handed the Democrats another midterm election talking point.
Also note Trump’s Trade War With Canada on Verge of Becoming Economically Nasty
A USMCA trade deal breakdown with Canada is increasingly likely.
The best we can hope for regarding USMCA is that things are only mildly stupid.
My readings this weekend suggest the CME fedwatch tool is not being taken seriously. Many pundits now believe that the Fed will not raise at all this year. I hear arguments that the Fed won’t raise near an election and that if the Fed was going to raise it would have done so already.
I suspect much of the stock market believes the rise in bond yields is actually growth and not the result of a short term supply side shock. Hence equities will continue up using this logic as well as the belief that Trump will not allow the market to go down before an election (good bet the market is rigged, just imagine the US Treasury hooked up to S$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.
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.
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.
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.
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.
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..)
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.
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?)
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.
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….
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.