The narrative is increasing about rising sovereign debt yields. The recent increase in the 30-year Treasury mirrors similar moves in the UK and Japan, where a deepening selloff—the result of massive government spending and the lack of policies to curtail or slow this spending—has pushed borrowing cost to the highest levels of this century.
The signal is quite clear that even at these levels there is no appetite for the long end and the risks going forward is that there will be even less appetite or demand.
In the US, the recent rise underscores the pressure on the government from investors that they want more compensation to finance spending plans. This is amplified by the President’s effort to gain control of the Federal Reserve in a pursuit to lower short-term interest rates which in reality may increase long term rates as such rate cuts could keep upward pressure on inflation that still exceeds the central bank’s 2.0% target.
It is an ugly scenario.
However, at the time of this writing, contracts for predicting Fed moves have price in about 90% of quarter point rate cut this month and fully price in two cuts by year end.
Perhaps more astonishing, the yield on the 10-year benchmark Treasury is about 40 bps lower than the start of the year. The thirty-year Treasury yield is only 11 bps higher.
Wow! Reality is the opposite of the narrative.
Is the proverbial dam about to break in the US? Many have suggested the inevitability of a crisis unless Washington begins to get its financial house in order. Many also believe the Treasury Department et.al. are intervening to suppress yields.
Markets will correct. It is not a question as to if but rather as to when.
There is a strong argument that current debt levels are disinflationary which will cause lower rates. Likewise, there is a strong argument that current debt levels will increase long term rates to attract buyers.
Perhaps the only certainty to write is the global economies are undergoing a tectonic change where perhaps a giant reset is occurring. The ultimate outcome is unknown.
Commenting on yesterday’s market activity, Treasuries rallied across the curve as the JOLTS Job Openings missed expectations and fell to the lowest level in 10 months. The slide in vacancies indicates companies are becoming more cautious and selective with their hiring as they attempt to gauge the impact of the tariffs but does not suggest outright weakness.
The rally in Treasury gained further impetus following a Fed statement that the Central Bank should begin to lower rates this month, a statement that was met with political skepticism.
Equites were bifurcated as the Dow was down about 05% while the NASDAQ advanced about 0.5% on the headlines that GOOG will not have to divest itself from Chrome.
What will happen today?
Last night the foreign markets were mixed. London was up 0.20%, Paris down 0.16% and Frankfurt up 0.73%. China was down 1.25%, Japan up 1.53% and Hang Seng down 1.12%.
Futures are nominally higher on a belief that tomorrow’s jobs data may provide evidence for faster than expected interest rate cuts. The 10-year is up 6/32 to yield 4.20%.
