What’s Behind the Bond Trouble

The headline at the Bloomberg News website couldn’t be clearer. “Global Bond Selloff Sends Yields to the Highest Level Since 2008.”

So, I move on to look at the other financial news sites that I follow. The headline at the website for the Financial Times reads, “Global Bond Sell-Off Deepens Amid Inflation Fears.”

Quite a nasty wake-up at zero dark-thirty for this old dog. I keep going. MarketWatch is blaring… “The 10-Year Treasury Yield Just Crossed a Key Threshold That Should Make People ‘Sit Up and Take Notice.'”

Balance Kevin Warsh. Sure, his address from Jackson Hole on Friday morning was indeed the catalyst for these recent yields. The still sort-of-new Fed Chair is not really the reason that the Japanese 10-Year Note just paid 3% for the first time in 30 years, though, and not the reason that British 30-Year paper now pays more than it has at any point since 1998. We know that the yields paid by sovereign debt securities have been on the rise (lower prices, higher borrowing costs) for months, even if the ride has been bumpy.

On top of a hawkish sounding Fed Chair, inflation has not been just a U.S. affair but has been even worse elsewhere. The rekindling of hostilities between the U.S. and Iran over the weekend and Pres. Donald Trump’s promise to hit Iran hard soon has rattled global markets while giving lift to crude oil prices. Then there is all of the borrowing by tech firms as they further develop artificial intelligence and data centers while building out their own energy grids. That alone soaks up at least some demand for debt securities that might have otherwise targeted sovereigns. This leaves federal governments reaching a bit in terms of borrowing costs.

Japan, Rates, Etc.

On Monday, U.S. Treasury Secretary Scott Bessent met with Satsuki Katayama and Kazuo Ueda at the G20 meetings in Asheville, North Carolina. Those two are the current Japanese Finance Minister and Governor of the Bank of Japan, respectively. Afterward, Bessent appeared at CNBC and said, “I have information that the market doesn’t have, and it’s my belief that the Japanese government and the BoJ will do the things that will lead to a stronger yen.” Well, in plain English, that sounds like tighter fiscal and monetary policy in a concerted effort in Japan.

What’s going on? Bond markets are “pricing in” a lot, and that includes what is perceived as an unacceptable level of inflation for many developed countries. Global bond markets are not collapsing. Not in my opinion. I am still invested in debt securities, but I have shortened my average duration. Until I see which way the wind blows, I am less exposed to corporates, and I am less exposed to notes and bonds than I am to bills. I need to remain flexible while I figure this out, while my “cash” pays me something.

I tried to persuade central bankers through my written words that increasing short-term rates could be a mistake economically. This is, however, bigger than one (albeit a cognizant, intelligent and some say handsome) man who trades the markets and writes about it. This is bigger than one central bank, even the world’s most powerful central bank. Markets are sending the message that elevated and now lasting inflation means higher policy rates for many reserve currency economies, and quite possibly for longer than we have been comfortable with for some time.

Too Hot to Handle: Debt

The U.S. national debt topped $40 trillion in mid-August. Earlier in August, Treasury Sec. Scott Bessent had mentioned that the Trump administration would soon roll out a plan to take on the now seemingly persistent (and growing) federal budget deficit. In that same Monday interview mentioned above, Bessent said, “Russ Vought (Director of the U.S. Office of Management and Budget) and I are working on a fiscal consolidation package that we’ll be talking about more in the coming weeks or months.”

It was less than two weeks ago that Bessent said that a plan was coming as soon as “probably at the end of this week, beginning of next week.”

My thoughts? Reducing the budget deficit will likely require what would be controversial cuts to entitlement programs like Medicare, Medicaid among others. There could even be increased federal taxes of one kind or another though under this administration that does not seem likely. As an old-school, supply-sider, I don’t like that idea, either. At a time when borrowing costs are rising, that would almost certainly constrain economic activity. There are the midterm elections coming in little more than two months’ time that will land legislative power in one party or the other.

Any imminent spending cuts that the White House announces ahead of those elections would likely put Republican party lawmakers in a very tough position as voters prepare to cast their ballots. After the elections, the two parties may have to compromise and put together some kind of a “tax and spend” fiscal package. Of course, that assumes that one party holds control of the House and the other the Senate. Then again, bipartisan cooperation, outside of response to an actual crisis, has been largely dead for most of the past 25 or 30 years.

Snowballed

The howl of the wolf
Snow in his eyes
Waitin’ to take you by surprise
Eye of the needle
Heat of the fight
Watch those teeth cause they’re ready to bite
You can see it comin’

-Brian Johnson, Angus Young, Malcom Young (AC/DC) 1981

Marketplace

Don’t look now, but markets are trading in the hole overnight. Most European equity markets are trading down more than 1% as are Nasdaq futures in the U.S. The U.S. Ten-Year Note just went by on my tape paying just a tick under 4.8% after going out at 4.75% last night and as little as 4.66% as recently as Friday. WTI Crude just went by at more than $88 a barrel, up from $86 just a couple of hours ago and up from $79 last Wednesday.

That’s in response to the now increased prospects for a hotter conflict in Iran. On Monday, elements of the U.S. Army’s 82nd Airborne Division that have been stationed in Iran’s neighborhood since the spring had their current deployments pushed out into 2027. In addition, the U.S. Marine Corps’ 11th and 31st Marine Expeditionary Units are being kept on board U.S. Navy vessels in the region close enough to act.

What does that mean? Simply put, keeping both airborne and amphibious infantry at the ready means that if it is deemed necessary to put US boots on the ground, the Marines are going to seize the facilities at Kharg Island while the 82nd blocks all roads that could resupply Iranian forces overland from third countries. Yes, our forces would suffer heavy casualties, but this is an option being left open to command.

Market Warning…

On Monday, the S&P 500 may have only given up 0.33%. The damage was even lighter across the Nasdaq Composite. Market realities appear to have deteriorated overnight. Losers beat winners at the NYSE on Monday by a rough nine to five. Advancing volume took just a 38.7% share of NYSE-listed activity and read this… Aggregate NYSE-listed trading volume was up 25.3% on a day-over-day basis. Now, that volume was bloated by “end of month” activity, but it was not “end of quarter”, so it is a little extreme. Monday was the most active day across the S&P 500 since Aug. 5.

Need to Know

• New Apple (AAPL) CEO John Ternus takes over today, after a 15-year run by Tim Cook. Cook will step up into the role of Executive Chair.
• The G-20 meetings will conclude today in North Carolina. SpaceX (SPCX) and Tesla (TSLA) CEO Elon Musk will be in attendance today as will OpenAI CEO Sam Altman and Nvidia (NVDA) CEO Jensen Huang.

Economics (All Times Eastern)

08:55 – Redbook (Weekly): Last 9.1% y/y.

09:45 – S&P Global Manufacturing PMI (Aug-F): Flashed 53.2.

10:00 – ISM Manufacturing Index (Aug): Expecting 55.3, Last 55.6.

10:00 – Construction Spending (July):
Expecting 0.1% m/m, Last -0.1% m/m.

10:00 – JOLTs Job Openings (Nov): Last 7.359M.
10:00 – JOLTs Job Quits (Nov): Last 3.232M.

4:30 p.m. – API Oil Inventories (Weekly): Last +4.2M.

The Fed (All Times Eastern)

09:05 – Speaker: Reserve Board Gov. Michael Barr.

Today’s Earnings Highlights (Consensus EPS Expectations)

Before the Open: MDT (1.39)
After the Close: DELL (4.92), GTLB (.18), MDB (1.61), PANW (.98)

At the time of publication, Guilfoyle was long NVDA equity.