Let’s discuss the fundamental and technical picture of long-term bonds.
Some believe in technical analysis, others don’t. Those who don’t believe don’t understand it.
The primary use is not to predict anything but to provide decent entry points for trades.
That said, there is generally a default expectation.
The default expectation of a descending triangle is lower, and this is a neatly formed triangle.
10-Year Treasury Note
One can make a case for a symmetrical triangle or a descending triangle but neither is as clean as the lead chart.
However, the 10-year yield and 30-year yield are nearly certain to break the same way. This is further evidence of valid patterns.
The symmetrical pattern is a continuation pattern. But continuing what? The most likely answer is a continuation of the January yield high above 4.75 percent.
The Fundamental Picture
What do the fundamentals suggest?
The Treasury bulls think inflation is improving and the Fed should cut interest rates. The bears will cite the recent Producer Price Index PPI report, adamant inflation is too high. They want the Fed to hold pat or even hike.
The fence sitters like Powell have been saying there is not enough information to do anything.
Certainly, we do not know what Trump will do with tariffs (or anything else), and how the markets will react to that.
For now, the Fed and the markets have bought into the idea that tariffs will not be as bad as once feared.
Fundamentally there is a position for that too. Trump has granted a lot of USMCA exceptions. That’s important because Mexico and Canada are our biggest trading partners.
The Labor Market
My view has been along the lines of “Does the labor market crack before the inflationary aspects of tariffs kick in?”
The Fed sees the labor market as strong, which I find preposterous.
The latest PPI report is very troubling, so how fast do jobs crack?
The technical charts can break either way, but they suggest the labor market concerns override the PPI.
That’s my view at the moment, but we need to see the next jobs report and the next CPI report.
Then, it’s not the reports that matter per se, but rather the market reactions to those reports that matter.
Risks to the Downside
I side with Powell and his newfound belief regarding downside risks to the labor market.
In fact, I have been harping about jobs for quite some time, expecting the negative revisions that happened.
Payroll Disaster
On August 1, I discussed the Payroll Disaster, Jobs Rise 73,000 but Massive Negative Revisions
There were 258,000 negative revisions in May and June.
The labor market is much weaker than most economists realize.
For specific details discussion of why we know this. please see QCEW Report Shows Overstatement of Jobs by the BLS is Increasing
Finally, please note that 5 Million People Have Exhausted All Their Unemployment Insurance Benefits
So, will rate cuts fix a weak labor market? We are about to find out, but my answer is no.
The Long-Term View
Everything above addresses the short- to intermediate-term picture. That’s a tradeoff between deteriorating jobs, weakening trade, and tariffs.
But please note that US Debt Now Grows by $1 Trillion Every 150 Days.
Tariffs are bringing in more money (but Trump now wants to redistribute it). Unfortunately, tariffs bring in money in the worst possible way. They impact small businesses and bottom-level income groups the most.
As implemented (even without the kickbacks) tariffs redistribute money from the poor to the wealthy. They slow trade. Bringing jobs back to the US is expensive and will raise prices.
The build here process adds to GDP for now, but making the US a trade island doesn’t over the long haul.
No one in ether party is doing anything to reduce spending. Trump’s grand experiment is doomed. It’s right for Powell to be concerned.
Fighting the Last Battle
There is one more piece to the puzzle and that is the Fed’s propensity to fight the last battle.
Powell and the Fed is still shellshocked over inflation that got out of hand from 2021-2023.
The Fed will not want to repeat that mistake and that means it will be slower to cut rates than the market is expecting.
This is fundamentally very supportive of lower long-term yields.
If a Trump clone gets his way with big rate cuts, expect the opposite unless the economy takes a big recession dive.
This comment isn’t on technical analysis, but the possible direction of rates in the short and long term.
In 2026, a large amount of 10-year Treasuries will mature. In 2016, Yellen drove 10-year Bond rates from 2.4 percent to 1.6 percent during January, and kept rates suppressed until late October, just before election. Yellen’s low rates matched the lows from Bernanke’s bailout of the mortgage crisis. (Except, there wasn’t a similar catastrophe in 2016.) When Trump was elected in 2016, Yellen let go and rates popped back up to 2.5 within a month. Rates didn’t return to those lows until Powell pushed rates down in 2019, to repurchase maturing 10-year Treasuries from the mortgage crisis. This was a year before the pandemic.
Though BLS measures of inflation don’t reflect Powell’s reduction in 10-year rates from 3 percent to 1.5 percent in 2019, the Chapwood Index for consumer inflation by state does. It shows inflation in the first half of 2019 was almost the same as all of the previous year. (According to Catherine Austin Fitts, the Chapwood Index is a more accurate representation of actual consumer inflation.)
Powell is motivated to repurchase Yellen’s 10-year Bonds, so the flood of matured Treasuries don’t spike rates. But, if he steps on the gas too early, real inflation will spiral. Powell’s purchases in 2019, followed by the pandemic bailout, put so much debt on the Fed’s balance sheet they’ve operated in the red for the past 2 years and not paid interest. If the Fed isn’t returning interest on their debt, what’s the probability they aren’t giving back the premium. The Fed would have more liquidity to repurchase the debt. But, whoever heads the Fed, inherits a maxed-out credit card.
Powell’s last speech may indicate the Fed’s priorities for long-rates. To bailout the mortgage crisis, Bernanke’s Fed copied the 10-year low-rate Fed policies from 1942 which allowed cheaper debt financing of WWII. That policy pegged long-rates to 2.5 percent. (The average monthly 10-year Treasury rate, after the mortgage crisis, was 2.5 percent over 10 years.) In 1951, the Treasury Department and the Fed reached an agreement, the Treasury-Federal Reserve Accord. A compromise which the Fed would continue to support the price of five-year notes for a short time. Powell’s changes are slated to recur roughly every 5 years. Intended to “make strategy more robust across a wider range of economic conditions, and to communicate more clearly how the Fed will weigh employment and inflation when they diverge”. Other parts of Powell’s statement were similar to those for the 1951 Accord. Does this hint at the Fed’s shortening their support from Bonds to Notes.
We can get both higher unemployment and inflation, as long as the reduction in supply exceeds the reduction in demand. The mix of tax cuts and tariffs might lead to just that, and the rate cuts that are coming just as tariff inflation will hit will just add to the spice. It’s very reminiscent of the mid 70s, when the Fed under political pressure cut rates as inflation started falling but wasn’t fully contained yet.
Same situation here re bond yields under a lower Fed Funds Rate monetary regime:
It’s a shot across the bow aimed at the rest of the human race (excepted the EU and the remnants of the British Empire which are ruled also by our (((rulers))).)
If they continue buying US Bonds and Treasuries and keep their reserves in dollars, then the Chinese, Russians, Arabs, and Indians will have acquiesced to being indentured slaves of the American Empire.
There is no other conclusion possible. Inflation is high and will get higher, meaning dollars will lose value ever faster. But (((we))) will create untold amounts of it to pay foreigners for their goods and services which we will use to wage war upon them.
So we’ll see now whether the rest of the human race consist of craven idiots. Or not.
Hi, I expect on long term yield curve control and deeply negative real interest rates (with high inflation). And the end of Fed independance.
The 10yr treasury note is suppressed by the Fed’s QE, I believe it will overcome this suppression & continue to climb beyond 5%+, you have to be a fool to loan the US a dime.
Jack, your data appears to be very stale, as in years out of date.
The Fed is not currently doing any QE, and hasn’t been for a couple of years.
It is currently tightening by letting bonds roll off the balance sheet. The Fed’s monetary base has been declining steadily for a couple of years.
Net credit creation is taking place outside the Fed. That is not QE.
P.S. I seem to recall that you were called out for this error earlier. If you want to ever have any credibility with anyone, don’t repeat statements that are readily disproven.
WRONG. The Fed still has under 7 trillion on balance sheet & reinvest every month 50-80 billion of maturing bonds. Yes they have run off 2.5 trillion but still the suppression continues. If you pull a beach ball under water by 9 meters & let it rise to 7 meters it is still repressed. There is still a continuing force holding down rates at unnatural levels & that is why there is an inflation problem.
You’re confusing a restrictive or accommodative policy with the act of easing or tightening that policy. The $7T balance sheet is a stock, like a reservoir. The other’s a flow, like a stream. Your balloon metaphor is not accurate.
The Fed is only conducting QE when there’s a net inflow of bonds causing the balance sheet to get larger. Reinvesting as bonds mature would keep the balance sheet the same size. But they aren’t reinvesting everything, and either the borrower has to give up on rolling that loan, or they have to find some other lender. That’s a tightening for either the borrower or someone else that the lenders aren’t servicing. That additional borrowing pressure tends to raise interest rates.
To make this clear, scale it down. Suppose I’m your personal Fed, you’re like the U.S. government. To keep things on a human scale let’s say you owe me $7 million instead of $7 trillion. And what you owe is distributed over time just like the bonds the Fed holds from Uncle Sam. Let’s say you owe me $20K/month spread out over 350 months, just about 30 years.
Now, you as the borrower have to pay me back $20K each month, plus interest on the whole $7 million. But you can’t afford that, so you want to roll the loans. I’m a nice guy, and I’ll let you roll a portion of your debts each month. I’ll even let you keep most of your interest! However, I’m only gonna roll half of what you owe each month.
So you owe me $10K this month, and another $10K next month, and so on.
In 6 months, you ain’t gonna feel looser!
Called out by who, MIsh? He called me out on nothing, he stated his belief which isn’t fact. I’ll repeat what I like, you or anyone else are not the law, ya country is falling apart, ya drowning in debt, you live beyond ya means. Because you cave in to others doesn’t mean I will, most of ya are sheeple in no way are you capable of understanding anything.
Thanks Mish. Your answer reminds me how my Econ professor answered questions with the words: “It depends.”
Guess I am not able to reconcile this statement from this post, “Does the labor market crack before the inflationary aspects of tariffs kick in?” and your definition of inflation which was “My definition of inflation is an increase in money supply and credit with credit marked to market.” as stated in a post back in August of 2012 or 13. A tariff does not add money; it moves it to different owners albeit less efficient, so how can there be inflationary aspects of tariffs? There certainly can be deleterious restraints on the economy from tariffs.
Because ‘the former owners’ (i.e. importers) whose monies were moved to “different owners” due to the tariffs they were forced to pay, will raise the prices they charge to you. Or they will fire you to cut costs and maintain profit: less production coupled with higher prices = stagflation
Trump’s (((handlers))) are intent on hurting you and destroy your country. It’s their nature, besides being their goal.
Read the story of the scorpion and the frog crossing the river.
You are not the first one to notice that inconsistency.
What looks like a triangle might be a trading range, like gold after 2011 high or NDX after 2000 high, before their waterfall drop.
The 60 year interest rate cycle (Kondratieff cycle) bottomed in 2020. That means the next peak is due in 2040 +/-1 year. The first 54 month cycle (Hurst cycle) coming out of that bottom completed in September 2024. As long as the yield stays above the lower support line from the 2020 low to the 2024 low, the top of the second 54 month cycle ( as well as the larger 9 year Hurst cycle) is not yet in. The second 54 month cycle is due to bottom in first half of 2029. The general trend will follow an exponentially increasing path, but the smaller cycles will wiggle along this larger path.
The Elliott Wave approach shows a possible double zigzag (abc corrective pattern) from the 2020 lows. I think we’re in the zag (wave c) part of the structure with a dip to the downside near term, followed by at least a year of yields making new 5 year highs.
If it bottomed in 2020 and it’s a 60 year cycle the peak would be in 2050, not 2040.
Anyway, the historical charts of interest rates show that the cycle is very irregular.
I expect a 1970s-style rate trough due to inbound housing-led recession, followed eventually by surge to higher rates due to intractable core inflation.
The Fed in the 1970s managed money supply (that was the tool for controlling rates back then). It was tightening of supply that broke inflation, not specifically high rates.
Inflation won’t be under control until politicians are once again competing to see who can do a better job of balancing budgets, as they did from 1980-2000.
Cycles are not usually symmetrical, and there will be some variability in the period. The 60 year cycle is best measured peak to peak, where the 54 month cycle is best measured low to low. The 60 year cycle has been recorded since the late 1790’s with precision. That means specific exogenous events didn’t cause these cycles. Different presidents, technologies, and wars would have caused a large difference in cycles, or no cycles at all. How can different historical events result in nearly identical cycle durations?
Coincidence, my good man
The data show variability in both the up and down legs, as well as the period, as well as the fact that there are really only 2 clear cycles in the data, except that the amplitude also varies… which means it may be purely coincidence.
I would add that an interest rate cycle under a gold standard is quite likely to be very different from one in a fiat-currency regime with structural inflation propelled by a central bank.
Here’s a nice graph
https://advisor.visualcapitalist.com/us-interest-rates/
Very good analysis, Mish. With debt growing $1 trillion every 150 days–accelerating if/when GDP declines–it is hard to imagine Tres. bond rates falling as much as they would in a typical recession.
Yeah Powell said tariffs will be a one time hit to inflation. My take is tariffs will raise prices and higher prices will force higher wages. We will end up in the same boat as during covid where wages push prices push wages. Until the fed puts the brakes on again. Except it will be trumps appointed chair.
Except ~ the chair does not set policy, the board does and Powell reports the boards opinion.
I see this as fighting the last war and although it is still important to see what the Fed will do on interest rates, I am afraid that attention is moving toward how the Fed and the Treasury are going to implement the Dollar-backed stablecoin the GENIUS (Guiding and Establishing National Innovation for U.S. Stablecoins) Act permits and actively supports. These stablecoins will support the US bond markets and make holding them even more necessary for international commerce than even the Dollar was which, of course, is its aim. Its adoption all comes down to bond market liquidity and the US has it in spades.
The transition will be interesting.
Unless, of course, Trump is told to pay back tariffs and does a Soviet style default like he’s been threatening to do in such a scenario. At which point, the question becomes “So what good is FDIC backing if the word of the government is meaningless?”
The answer: not much.
Not going to happen.
He will fight paying those tariffs back tooth and nail because he’s spent the money already. That’s literally just the exact claim he’s making currently: “it will be like 1929”. What’re the courts gonna do? Come to the Whitehouse and give him the old “WHERE’S THE MONEY LEBOWSKI?!”
But doesn’t the $150trillion/150days prevent any meaningful decline in long rates? Look at the forward Treasury yield curve. Nothing much happening.
$1T/150 that is
$1T/100
I believe treasury is not issuing new 30-year bonds which puts pressure on the long rate via restricted supply. If you look at the weekly offerings, it is almost all 7-year and much shorter duration.
Not issuing 30yr bonds is an admission the US won’t be around in this form in 30yrs. The 30yr duration is the best way to borrow for a healthy & trusted country. When you’re on the verge of collapse, on the verge of default through debasement that route closes. Financing a country on short term loans of 2yrs is the last stop before collapse.
Three letters for you:
YCC
If they are forced to, the Fed WILL start buying long-dated treasuries. When is hard to say. I would guess that the Fed is forced into QE by the end of the calendar year.
Their only mandate should be zero percent inflation target.
O/T: Go to “Inside China Business” and watch the latest to learn how Chinese tractors and *PRODUCE* enters the Indonesian market at such low prices that it’s improving the quality of life for Indonesians.
Deflation? Low tariffs facilitating trade? Must be nice.
Until china uses it against them.
China is notorious for dumping products at a loss-to-them in order to undercut competitors. They capture market share by driving competition out of business. Then prices go back up. Or they use their market share as political leverage for other goals.
Should add that it’s not just China, this sort of trade practice has been a thing since at least the East India Company (and probably goes back to Rome and maybe even Babylonia before them).
Not an expert on this subject, but I wonder about tractor parts and maintenance costs?
1W TNX. In Oct 2023 SPX hit it’s bottom. Since Oct 23 2023 high TNX made an A-B-C down to Sept 16 2024. Triangle: Sept16 2024 lo to Mar 31 2025 lo. // Jan 6 2025 hi to May 19 2025 hi. The downtrend might resume soon.
As long as people think rates will decline, while money is increasing, stocks will benefit.
Prof, M1 is rising to a lower high. It might drop first. Option #1: TNX will rise above 5.10%. Option #2: TNX will test Oct 2018 hi @3.35% and Apr 2023 lo @3.25%, before rising to 8%/11%, to Oct/Dec 1979 hi/lo
These are all good points, but the labor market will be faced with a completely new (supply) reality. Depending on immigration enforcement, the new monthly break-even (= keeping the unemployment rate around 4 percent) payroll numbers could be as low as 30,000-50,000 per month (down from 150,000-200,000). In addition, immigrant workers tend to be almost completely concentrated at the low- and very high-skilled ends of the labor market, which will lead to very different types of wage pressures than in the past. Even a competent Fed, an unlikely prospect, will be hard-pressed to manage the mess created by Trump.
Re “ immigrant workers tend to be almost completely concentrated at the low- and very high-skilled ends of the labor market”
This is not true in my local area. The high-end folks are able to bring in family after a couple of years, and that fills out the middle-skill segments. Not so sure how the low end gets populated through the legal immigration system, either.
Concerned about unemployment. Concerned about bringing jobs back to the US. Errr…disconnect.
I appreciate your insightfulness and your ability see others perspective. Count me in the camp of “don’t believe in technical analysis” because I have always seen it as a prediction tool that seldom pans out. Now I have so much to re-evaluate based on this piece of wisdom:
“The primary use is not to predict anything but to provide decent entry points for trades.”
Thanks!!!
The fiscal position of the US government is already bordering on catastrophic and as Mish mentioned worsening by the day.
Macroeconomic factors may influence (slightly lower) bond yields over the very short-term, but the long-term trend higher is at this point irreversible.
1D: TNX. Apr 4 didn’t close Oct 18/22 gap. Since Apr 4 TNX made an A-B-C up to May 22 high. May 22 lower close led to July 1. July 1 is support. Aug 4(C) and Aug 5(C) breached support. They are lower close in a bearish territory. May 22 to July 17 highs is resistance line. TNX failed (so far) to reach it. Targets. down: 3.80%. Or to Oct 1/2 gap. up: … Gravity with Germany prevents 8%. If the EU will spend trillions on Druggy plan US10Y and the German 10Y might rise in unison. After 2 years US30 failed to breach Oct 23 2023 high @5.18%
Powell dug a hole for himself. As I said: “The 4th qtr. 2019 is not the problem. The 1st qtr. 2020 will be negative.” Nov 26, 2019.
Economists at the FED are idiots. Spend more money on data collection and data accuracy.
The means-of-payment money supply hit an all-time high in November 2020. Powell had to be completely insane to think that inflation would not be the result.
Economists don’t know what the hell they are talking about. Banks don’t lend deposits. Deposits are the result of lending/investing period. All interest-bearing deposits are derivative deposits. The banks pay for the deposits that they collectively already own.
The economy may be slowing but the unemployment level is at historical lows. If Powell caves in now, he will interrupt the deflation in housing next year.
Yeah, that what I said last year, September is a good time to buy bonds. But if Powell lowers rates that may push back the date to November.
Thank you for this refreshing post. I started, as a financial professional, reading your blog 10+ years ago. Even though you’re a bit more Libertarian than I am you mostly included charts and data to the topics of your posts. Please more of this sir.
I reiterate the point I made on another post yesterday: There’s nothing the fed can do with Trump intent on dragging America to Venezuela in terms of economy and respect. Raise rates, lower rates, as someone else said on the same post, “it’s like putting a bandage on a broken ankle.”
I say good luck doing anything about this situation before he’s removed. The economy will continue to decline, trade partners will continue to find new alternatives, and China will continue to get an increasingly ugly leg up on us as we patently refuse to compete with them on any futuristic industry.
You can’t predict human behavior with any real consistency. You can use technicals after the fact to say….see this is what happened
You use human behavior to create a model, and then use the model to give a high probabilistic forecast.
That’s B.S. The distributed lag effects of money flows are mathematical constants.
The Fed just made if people. You cant predict what it is going to do. The models have no high degree of accuracy. In the end fundamental win out.
If this were predictable we’d all get rich but are fighting against what insiders know.
Someone always has more direct information. It’s not useful until after the fact.
If there’s one thing that’s highly predictable is human behavior.
“So, will rate cuts fix a weak labor market? We are about to find out, but my answer is no.”
I agree. The fundamental problem is forecasting. No business out there can forecast anything with TACO changing his mind every 5 minutes on tariffs. If you can’t forecast then you can’t hire and heck you may even layoff and just get by until this clown leaves office in 1246 days or less if dems take Congress and rein him in.
Worse yet. Trump has gone full communist and made Intel a government partner and I assume Trump will expand his communism onto other businesses.
https://x.com/GovPressOffice/status/1959053477348511785
And I was told by commenters here that Kamala was the communist?
Key Characteristics of Fascism
I think this would fall, along with all the threats, tariffs, and other manipulation, under “Economic Control”
Between the new york socialists and the washington d.c. communists, it really is time to have an exit strategy isn’t it?
I think I’ll stay and fight. I don’t have that many years left… might as well go out in a blaze of glory.
Just to end up with new york communists and washington d.c. socialists.
I thought it was the “New York Bankers” and “Washington Politicians”.
I’d prefer those to the Florida fascists.
That’s a rare level of principles to see in a place like this.
I don’t know that it’s principle so much as the desire to leave a mark at the spot where I leave this planet.
It’s time for the fourth turning
Excellent post!
Did you notice how well that list also fits Socialism? The main difference is that the fascists are more concerned with ethnic identity and the socialists are more concerned with economic identity.
Of course in Washington State Blacks get free money to buy a house and Whites do not so there is considerable overlap. See also reparations.
Show me your socialism list.
From what I understand, domestic investors have been selling UST bonds during the day, while foreign investors have been buying them in the evening and overnight hours. Not sure if this activity is the same with corporate bonds.
Someone, somewhere, must hold ever US dollar printed or bond sold.
China masks its holding in SOEs and European marks with little reporting of the true owner of the bond.
Foreign holding predominately a function of US deficits couple with periodic needs to shore up the yuan by selling treasuries.
That’s what matters, not overnight noise.
What happens if Xi orders that the USD of the USA/China trade deficit are not invested in UST’s, but just held as balances in the banking system?
Indeed, what happens if XI orders that the proceeds of maturing UST’s are treated in the same way?
Surely that would push up US deficit financing costs to an unacceptable level, whatever the Fed does?
Watson
How can Xi order anything?
And what good would it do anyway?
Right now Xi can trade US$ denominated assets for gold, euros, or yen assets.
But someone mathematically MUST hold the dollars he is selling. Who is that?
Bear in mind how China gets the $ in the first place by running massive trade surpluses.
The way to easily get rid of $ is to run trade deficits.
But China does not want to do that.
Probably I misunderstand but, since China runs trade surpluses with the US, USD’s build up under China’s control.
_Currently_ it looks like those USD’s get invested in UST’s.
I simply speculate that the purchase of UST’s is not a given; there is a threat to the US in that, if Xi ordered it (he is a dictator), the USD could remain as bank balances.
If that happened there might be rather less of a bid for UST’s, and thus US rates would rise to levels that could prove…unpleasant.
Watson
The FDIC limit is $250,000. Where is China going to park trillions of dollars?
And why would it, even if it could?
Treasuries pay interest and are the most liquid asset on the planet.
‘The FDIC limit is $250,000. Where is China going to park trillions of dollars?’
It doesn’t.
It leaves them (presumably in many, many USD-denominated bank accounts) whereever they currently end up as the result of US purchases of Chinese goods.
‘And why would it, even if it could?’
Threat (eg If you intervene when we retake Taiwan, we will smash your over-indebted financial system).
‘Treasuries pay interest and are the most liquid asset on the planet.’
Value of threat is greater than opportunity cost of lost interest (and the risk of loss due to being outside FDIC limit).
Watson
And yet their holdings continue to decline.
They were not so liquid in Feb 2020 when the market seized up!
That’s the danger, there are no safe or liquid assets any more thanks to the corruption of the whole system.
“the most liquid assets on the planet” is just a cliche now…
To say nothing of all that real estate that’s getting cheaper by the day because of the dollar decline.
Someone is Powell and somewhere is the Fed, the largest buyer of US treasuries for the past decades.