The start of historically strong month, most markets declined amid a steep selloff in cryptocurrencies. A rout in Japanese debt rippled through global bonds which caused the US yield curve to be its steepest since early 2022.
Commenting further about Japanese debt, Japan’s benchmark yields hit the highest since 2008 on signs that the nation will boost interest rates. Traders in US debt remain hypersensitive to BOJ policy given its control and liquidity of the yen on a global basis.
Higher rates on Japanese debt may entice domestic investors to keep more at home to fund local government bonds, instead of investing in higher yielding assets overseas such as Treasuries. Japan is the largest holder of US Treasuries owning about three times more than China.
Domestically the markets are now suggesting an 80% chance the FOMC will lower interest rates next week for the third time this year. A view that was further solidified given the President’s support of Kevin Hassert as the next FOMC Chair, a monetary dove.
All must remember the Chairman only has one of the nine votes on the FOMC and serves as the spokesman for the Committee.
A combination of expected dovish Fed policy [lowering interest rates with inflation 50% to 75% higher than its accepted target], gargantuan demand for monies by the Federal government, fiscal policy that is unsustainable, currency and sovereign debt relationships, and the huge demand for debt for AI spending, are the primary catalysts for the rapidly steepening yield curve.
The ramifications could be huge if the proverbial bond vigilantes regain control of the Treasury market. Treasuries were not supported by a disappointing ISM Manufacturing Index as it fell by the most in November by the most in four months and missed expectations by a moderate amount.
Both gold and oil advanced yesterday, the former on monetary and inflation concerns and the latter the continued attack on Russian oil infrastructure.
What will happen today?
Last night the foreign markets were up. London was up 0.28%, Paris up 0.37% and Frankfurt up 0.75%. China was down 0.42%, Japan up 0.01% and Hang Seng up 0.24%.
Futures are flat. Bitcoin is nervously unchanged. The 10-year is off 5/32 to yield 4.11%.
