美债收益率飙升之谜：政策路径、能源冲击与政治博弈

Hello my friends. Today is September 26 and this is Markets Weekly. All right guys, so last week was a crazy week in markets. So we have a lot to talk about. First off, of course, we have to talk about the bond market. Yields absolutely surging. Let's talk about why that's the case. Secondly, let's talk about some bad stories about why yields are surging. And lastly, we also had some random political developments such as Ankoshi giving the Atlanta Zoo, two pandas, and some interesting polling data uh that I think would be very important in guessing what happened the coming weeks and after November. All right, starting with the bond market. So, let's start with this chart of 10-year and 30-year yields. It looks like they're basically going parabolic over the past week. They basically rose every single day. And taking a step back, they're at levels that we haven't seen in decades. Now, if you look at real yields, say 30-year tips, real yields are about 3.2% also at multi-deade highs. So, yields are are high and the move has been pretty aggressive. But what really surprised me though is how muted other asset classes have reacted to this. So, the S&P 500 the past week basically just kind of shrugged its shoulders. Um, what about say corporate bonds? You'd think that with interest rates rising, maybe investors would have some concern about corporations ability to meet their interest obligations. Maybe ask for, you know, a little bit more premium, slightly wider corporate bond spread, but corporate bond spread still very, very narrow. What about emerging markets, right? Not just yields are higher, but the dollar is stronger as well. But looking at emerging markets, they don't seem to care either. And it's not just that. say looking at even gold which you would think would be impacted by higher yields doesn't seem to care either. So um I honestly I've never seen anything like this to have such a aggressive move upwards in yields and yet everyone else just kind of shrugged their shoulders. It's it's it's really interesting.

So why are yields moving higher? Again if you follow this channel for some time you know first principles yields are largely the expected path of Fed policy. Fed controls the overnight rates and the market price is in the path of overnight rates when it guesses say two, five, seven, 10 year yields will be. So how do we know what the market is pricing in for the path of policy? We'll look at sulfur futures which is basically the market's best guess of where the path where the policy rate will be at a particular point in time. If you're interested in how this is this happens, you can check out my book central banking 101 second edition which basically tells you how this all works. So if you look at the expected path of policy uh from through social futures week over week, you can immediately see why yields are rising. So week overw week the market is now pricing in an extra 25 basis point hike in the path of policy and it's also of course pricing in a higher for longer trajectory. So market now thinks Fed is going to hike more and it's going to hold that higher stance for longer and that is pushing the entire yield curve upwards. Now this is actually really remarkable when you think about it because just a few weeks ago we were talking about Governor Waller being dovish now not quite sure whether or not he would hike it September passionately pleading to the public give disinflation a chance. And now between now and then the market is basically pricing in a 100 basis points in hikes. So really things can change very rapidly. So why is the market now pricing in an aggressive rate path? Well then again that goes to how the market understands the Fed. Fed is a dualmandate central bank full employment and price stability. On the employment front again the employment data has been good. So we're creating jobs. unemployment rate is trending lower and economic data suggests that you know the economy is holding up right so we got PMI data that seemed to have an impact on yields but really PMI data is like second tier stuff so it seemed like the market was just looking for reason to do what it did but anyway with economic growth okay you don't really have to worry about the employment mandate what about the inflation mandate now the inflation mandate as we all know Fed has not been meeting it inflation has been above target for years And now with energy prices continuing to rise, diesel at all-time highs, I think the market is becoming more concerned about inflation and just price thinking that the Fed is going to be uh more and more hawkish, hiking rates to say, you know, 5% and then holding that to uh to get inflation lower. So, in order for us to get rate cuts, really, we're going to either have to have some indication inflation is coming down, and that could be um a weaker equity market, so less wealth effect demand, or some resolution in the Middle East that would bring energy prices down. And at the moment, that just doesn't seem to happen. Now, it's it's worth it's worth asking the question, though. So, let's suppose that the Fed did hike up to 5%. Would that put enough pressure to either make employment crack or inflation lower? So, I guess that's something we'll find out in the coming months.

One more thing I'd like to address is that I hear the story most commonly by boomers that would say that, you know, the Fed just kind of does whatever the 2-year yield does. So, uh, and using that to explain yields, and that's just straight up wrong and very obviously wrong. So, first off, of course, I can't read the Fed's mind, but when I read Fed officials talk and you know, they do a whole lot of speeches of medicine and so forth. I have literally never heard a Fed official go on and say, "Guys, I'm uh hiking rates." Because, you know, I looked at the two-year and it says I'm going to hike rates, right? That doesn't So, I can't read their mind, but they've never said that. So, there's really no reason to think that. But more importantly though, if you look at what happens in the interest rate markets during Fed meetings, you'll see that so Fed meeting happens and the market reacts, right? So if the Fed were really just following the 2-year yield, then you wouldn't have that. But the causality is very clear, Fed does something, market reacts. There's actually a very interesting paper of this that was flagged by Joe Weisenthal. So there's these researchers basically segmented out the the interest rate data into two portions. The three days around a Fed meeting and all the days other than a Fed meeting. And if you just look at the days of the tenure, the tenure moves during around three meetings. You'll see that over the past few decades as the tenure has steadily trended lower, all that movement basically happens around Fed meetings. Now in contrast, if you look at the graph on the right where they look at how yields changed outside of those three days uh that were around the Fed meeting, you can see that the 10ear yield basically did nothing. So what that tells you is that uh all the action that happens in the 10ear yield happens around Fed meetings and that's a very clear signal that tells you Fed telegraphs uh what it's going to do. the market takes that and shapes a path of policy and that's what drives rates. Right? So again, if you trade rates, you should know this, but um again, it's just more empirical proof of what any rates trader should know.

All right, the second thing I want to talk about is just some really bad stories I keep hearing in the markets about what's driving rates. So, first off, I want to point out this story. So this guy Ricardo, I don't know him, but by all accounts, just someone who is a good economist. Now, he was going to get the a top job at the IMF, but at the last second, uh Trump admin jumped in and said, "This guy said bad things about tariffs, and so we can't have him." And so he uh he lost that job, and uh someone else is going to take it. So this guy worked his entire life, worked hard to get this top job and just at a moment he this this political actors came and just basically screwed him over. Now being an economist and saying tariffs are not good, there's really nothing controversial about that. I would say that most economists would say that. But I think what this is actually tells me is that there uh the the climate is becoming very politicized and if you are you know at a bank or a think tank or some kind of media organization you are going to be scared in presenting your analysis because maybe one day down the line this political actors will come and screw you or maybe you think that by towing the administration's line you can get some kind of favor. um a good job or something like that. So, I think that economic analysis is becoming more politicized and I think that's part of the reason why I hear things that are just obviously just obviously not true. So, let's talk about some of them. First off, of course, higher yields. Ah, dude, it's just driven by the deficit, guys. Of course. Now, the US does have a pretty high fiscal deficit, but take us take a step back. You can see that yields are raising globally, right? Even in Germany, the German bond yields are surging. Now Germany as we all know is a a country that is very fiscally responsible low debt to GDP ratio. So that can't be the case. It's obviously a global factor and that is the inflation uh the energy shock that's driving up inflation and prompting a global rate hiking cycle. U ECB has been hiking and has continued to do so. Um Binkabland will probably hike as well and of course Japan is hiking as well. So that a fiscal deficit is tough. That's just obviously not true. What about strong US growth driving up um driving up yields? Wow. That's what the president would say, right? We're the hottest economy in the world, so obviously yields go higher. Except that's obviously not true. So first off, again, it's a global phenomenon, and I don't think anyone would say that European growth is surging, right? So, but if you look at US growth though, US growth last quarter 1.5%, first quarter 2%. So, it's okay, right? It's okay, but it's definitely not surging. Some people would point to a final sales private domestic consumers. So, basically what people think of as core GBP, I think it's around 4% as being indic indicative of strong uh US growth. But that is not true. So, what that is, it's a measure of domestic demand. and think the thinking is that if demand is strong that means a stronger economy but what what's actually happening is that demand is largely for AI stuff right so the AI people are you know buying a whole lot of stuff but the stuff they're buying is largely foreign imports right chips from Taiwan and so that demand actually flows through to abroad where you can see that in Taiwan for example the GDP growth is 11% guys an 11% GDP growth that's an economic IC boom and that is because of US buying uh for for the AI boom that does trickle down a bit to other US industries so people electricians and so forth but you know even after all that trickle down it's 1.5% the last quarter right so maybe it'll be 2% this quarter I don't know depends on which GDP now you're looking at depends on which economist you talk to um but the AI boom is really a boom for say Taiwan and South Korea Korea and a little bit in the US. Again, the ultimate measure of US growth is US GDP and it's really just okay. Some people also point to nominal GDP growth as a driver of yields. Now, these tend to be boomers. I think maybe in the 70s and 80s when they were growing up, they traded based on a relationship that, you know, yields should be related to nominal GDP. And if you look at this chart, you know, you can kind of see that. But you also know that for decades, you know, yields are higher than nominal GDP. for decades yields are lower than nominal GDP. Their way of thinking that mental model failed terribly for the decade after the great financial crisis and they seem to be asserting that it's coming back. I don't know. But just looking at this chart, it's very clear. Sometimes it's high, sometimes yields are higher than nominal GDP, sometimes they're lower. That doesn't seem to be a very honestly a useful thing. Again, rates are the path to policy.

So, one other thing is of course, and we've talked about this before, is that uh tremendous surge in AI issuance is pushing up treasury yields as uh AI out competes crowds out treasuries. So there's this interesting piece in the financial times by uh Toby who basically did the math looking at issuance by AI companies breaking it down by duration equivalence and he's saying that you know the quantity it's really not that special man I think this is it's just not that accurate to say there's this huge surge in AI issuance and more importantly when you look at price based measures so what I look at is swap spreads you just don't see any crowding out either so swap so When you have an over when the supply of treasuries overwhelms demand, what you would see is that treasury yields rise relative to the expected path of Fed policy. So that manifests in negative swap spreads and you saw that during liberation day where you suddenly had swap spreads become very negative because everyone was selling treasuries and the market was overwhelmed. At right now you just don't see that at all. So when you have too much treasury issuance, what happens is that these leverage buyers can come out. They can buy treasuries with levered money and hedge that interest rate with a swap and harvest the swap spread as compensation. That is the ability of the financial system to warehouse cash treasuries. So when that warehousing ability becomes stretched, swap cribs become very negative because they demand even more compensation to to warehouse that. But again, you just don't see that, right? So just crowding out that that seems to me to be very obviously wrong. So these are just I don't know I think of as not accurate stories to describe what's happening in the markets. It's really super super simple. We have a negative energy shock. Central banks are inflation targeting. So across the world we're in hiking mode and that's what's driving yields higher and we're going to either uh I don't know. So I think there's a limit to how many rates hikes the market can price in. We're pricing in another three. Is that the limit? I don't know.

Uh which actually brings us to our last topic. So sunundry political developments that I think will be important in understanding the trajectory because ultimately a big thing will have to do with how the Iran war is resolved and of course beyond that the midterm elections. So this past week we did have Uncle Shei come and visit the White House and you had President Trump waiting at the tarmac to welcome Shei. This is something that American president hasn't done in decades. And not just that, the day after he posts on Twitter, you know, President Xi looks great. Madame Shei, beautiful. And of course, they seem to have a good time. So it's it's very clear and has always been clear that the president likes Shei, right? Last time he went to visit China, his granddaughter speaks Mandarin, had her sing Mandarin songs to President Xi. Of course, it made she very happy to see that. All right. US president's granddaughter is learning my language. President likes Shei and wants to have a working relationship with China. He understands the importance of this and how the two economies are strongly codependent. So, you know, you read all these think pieces about a great struggle or uncouping war, US China, blah blah blah, but honestly, those are just just stuff written by unimportant people who are just trying to get you to fight wars. That's just nonsense and obviously obviously not how the president thinks. So, having good relationships with China obviously very good for the global economy. Looks like Trump is going to visit Chi in China in November and they'll meet again in Miami for the G20. So overall, not much concrete, but having an open dialogue is good. And always also interesting to note that it seems like China supports the US position that there should be no tolls in the um in the straight up or moves, but of course China does continue to provide a lot of support to Iran as well. So, at the moment, the past week, Iran gave a I don't know proposal to end the war. This morning, uh, well, actually last night, Friday evening, Wall Street Journal reports that that was rejected by the president. So, don't really know what's going to happen right now.

So, which is really strange because the president is heading into midterms and there is a lot of polling data that suggests that over the past two weeks, the president's approval rating has sunk significantly and the polls for congressional races in even deep red states are just just kind of imploding, right? So there's an increasingly large chance that the Democrats would not just take the House, which was always kind of baked in, but the Senate as well. There could be a really, really big blue wave. And the president would tell you that he doesn't care. But obviously he does, right? Because if that were be to be the case, things would get very difficult for him. All sorts of investigations, not just of him personally, but the people around him. Uh it's well known that his family, his sons Jared Kushner making a lot of money uh through their relationships with government and and foreign leaders and of course Trump is uh has all sorts of crypto things going on as well. Also, of course, selling access to his truth social as well. So there's a lot of things to investigate. Things can go very badly for him. And you know, he won't even be able to confirm Supreme Court justices if he loses the Senate. So, say elderly justices like Justice Thomas, should he not, you know, decide to step down or pass away, you know, the the Republicans will lose the Supreme Court majority as well. So, there is a lot at stake here. So, it's hard to say. I I don't believe that he doesn't care. I would assume that it's more of a negotiating posture and that hopefully, you know, this will get some kind of resolution. Otherwise, he has a lot to lose. Now, the market, the way that I see it is that there's so many people conditioned on some kind of taco that everyone is eager to just kind of jump and try to ride the next leg in the rally. And so, that's part of the reason why I think the equity market is so resilient. There's just too many people conditioned to fade the noise and buy the dip. Now, should there be some positive developments in the straight permuz, I could easily see like the NASDAQ go up 10% really quickly. It's just because everyone is so eager to chase. Um, and I also note though that it seems like the US is having more success in getting oil out of the street of moose. So that's part of the reason why I think it's not as impactful. Although refined products like diesel continue to be a problem. Now if nothing changes though, I think that, you know, things could get really messy heading into a a Democratic House and Senate because, you know, we could have taxes go up. we could have, you know, things that are not good for the AI trade and so forth. And of course, a lot of political turmoil and that's that's just not good for um the markets and or the economy. So, this is something that we should really watch closely. I I have it. It's hard for me to believe that all this bad polling. Think about all the Republican operatives and congressmen just calling the president and his team every single day expressing concern. Think about all the farmers complaining and so forth. So, it's a lot of pressure on him. So, hopefully what he's saying right now is just a negotiating posture and we'll have some resolution soon. But, I guess we'll find out in the coming weeks. All right, so that's all I prepared for today. Thanks so much for tuning in. Talk to you guys next week.