US Economic News

[weijian]

Most of us probably don't look at it but the US bond move past 2 days has been spectacular. It will likely pressure the SGD yield curve to go up and mortgage rates to rise.

Indeed "gradually, then suddenly" I think would have been worse if Fed didn't hike rates to curb inflation. Warsh was forced his hand to face Trump's ire. I didn't think he would cut before mid-term but $100 oil did.

Weird that the equities market so sanguine as 10Y crossed 5% and the USD remains relatively strong this month

(Bloomberg) -- Yields on the US’s longest-dated bonds climbed to the highest level in more than two decades, the latest milestone in a global selloff driven by inflation fears and concern about government debt burdens.
A fresh jump in oil prices on Thursday lifted five- to 30-year Treasury yields to new multiyear highs, with the 30-year rising to levels just shy of 5.5%, the highest since 2004. Ten-year yields rose 10 basis points to 5.21%, the highest since 2007.

hi specuvestor,

Since Trump and his finance team regard the 10Y as their KPI metric, I suspect there isn't a lack of people on this forum (including myself) that frequently looks at it. And in the twist of fate, the last time the 10Y was so high was when I opened my first brokerage account.

It seems like Trump has comfortably broken Biden's prior 10Y yield record, with the latter achieved in late 2023 as a result of the series of rate hikes from 2Q2022. Who knows how long the current hike cycle will last?

Nonetheless, interest rate and treasury yields are one thing, but how equities perform is another thing altogether, isn't it? There was a bear market in 2022, which ravished many covid-era darlings/growth stocks but it was relatively brief (by historical standards). The bear market had some overlap with the Fed's rate hike cycle. But if the rate hike cycle is a soccer match, the bear market hit its bottom around 5-10mins before half time, before recovering to hit new highs again while rates were still rising.

Now rewind back to early 2018. Fed started raising rates to get out of ZIRP and then hiked enough to scare equities into a (brief) correction. IIRC, that contributed to causing the Fed to stop their rate hike cycle.

Finally we go back to late 2007. The Fed did its first rate cut (after bottoming out in 2003 as a result of 9/11 + 2nd Gulf War) and equity markets rallied. And when subprime problems started appearing to impair balance sheets, the Fed continued its rate cuts in 2008 but equities kept dropping.

So it seems like there are significantly more factors involved in a probable causality relationship between interest rates vs treasury yields vs equities, whether on an immediate or time lag basis. One of the clues I got from all this was that investor risk sentiment as been a key factor towards equities' performance. If investors are generally tilted towards risk seeking, a Fed rate drop will translate to encouragement to take risk, while an increase in CPI will translate to a hot economy. But when investors are generally risk adverse, a Fed rate drop confirms their worst fears. End of the day, many of us are just looking for confirmation from external parties in order to validate how we are feeling internally.

[specuvestor]

Hi Weijian

Hiking rates because of growth and because of inflation have different outcomes like you mentioned. 2018 hike actually coupled with Trump's first trade war while 2003 to 2007 was arguably low interest rate to recover from dot com bubble that led to GFC

But most readily available analysis are just looking at statistical correlation between stock market and rate hikes/ cuts with no understanding of the underlying reason or circumstances. It is obvious I'm not a quant person

[weijian]

Howard Marks has a memo about the recent rise in US Treasury yields. While technocrats/intellectuals continue to worry about US fiscal spending, MAGA supporters are rooting for Trump's 5k/adult paychecks when the Republicans win the midterms (I wonder if blue voters will get the paycheck too?)

Shall We Repeal the Laws of Economics – Part III

The expansion of the Fed’s balance sheet in 2008 was a necessary and prudent step to stop a meltdown of the world financial system that appeared to be underway. (As it turned out, it didn’t debase the dollar; in my view, it largely offset the destruction of money and credit brought about by the Global Financial Crisis.) Today’s massive deficit financing is being done in response to deficits of our own making. And it’s taking place in a time of prosperity, so it can add to aggregate demand and inflation pressure.

As Druckenmiller wrote in the WSJ, “If the 30-year must trade at 5.5% to clear, that isn’t a crisis. It is an invoice.” We either must pay it – whatever it grows to – or we must fix the underlying problem.

While we’re waiting for Washington to solve the problem, what should we do in our portfolios? That’s what a friend of mine – not an investment professional, but a nationally known entrepreneur – asked me last month. “Should I sell my stocks?” That’s not the answer, I told him. The problem we face isn’t a problem with the U.S. stock market or with U.S. companies. It’s a problem with U.S. fiscal management, and ultimately a potential problem with the U.S. dollar. If you sell your U.S. stocks, where will you put your money? A bank? A money market fund? Bonds? If they’re denominated in dollars, you haven’t escaped the risk under discussion here. If the U.S.’s bad habits catch up with it and investors become less happy with U.S. Treasurys, that’s likely to manifest itself through a lower opinion of the dollar. If you want to do something about that risk, you may have to move into (a) assets denominated in currencies other than the dollar, (b) non-financial assets, such as gold or non-U.S. real estate, or © non-U.S. companies or cryptocurrencies.

https://www.oaktreecapital.com/insights/...--part-iii

[specuvestor]

Warsh suprisingly hiked rates in September which in my view helped to stabilise the 10 year around 5.25% handle else would be worse with escalating conflict between Saudi / Houthi, which was another surprise. Yesterday CPI was also higher than expected as Hormuz tensions picked up again.

If Trump attacks Iran before mid-term then it is likely that he thinks he is going to be a lame duck president, but not so great for oil price and inflation. I think Fed probably will play it safe to hike in Dec rather than Nov before mid-term and be embroiled.

SPR in US looks to drift further down to 270m barrels, lowest since EIA compiled it

Sep CPI 3.7%
Sep Core CPI 2.6%

As of 14 Oct Cleveland Fed expecting
Oct CPI 3.78%
Oct Core CPI 2.48%

Sep PCE 3.60%
Sep Core PCE 3.05%
Oct PCE 3.74%
Oct Core PCE 3.13%

US SPR has declined to less than 300m barrels. As per my 11 June post below we might see 250m barrels by end of August or maybe September, despite President Trump insisting that middle east oil impact on US is very minute

And also in my June post I think unlikely to hike rates this year even thought Dec might be a toss and PCE coming in higher than CPI.

Jul CPI 3.4%
Jul Core CPI 2.5%

As of 12 Aug Cleveland Fed expecting
Aug CPI 3.36%
Aug Core CPI 2.38%

Jul PCE 3.65%
Jul Core PCE 3.29%
Aug PCE 3.73%
Aug Core PCE 3.34%

[quote="specuvestor" pid="174221" dateline="1784114269"]
Surprising that June inflation went below all expectations, down -0.4% MoM first time in 6 years, mainly from sharp 10% drop in gasoline price... which dovetailed into the note below that US seemed to suffer more from oil prices though Trump denied it.

With the Iran war continuing 3Q might not get the same reprieve as June but market like to think it's one off impact that 2027 will be normalised. US 10 year bond yield flirting with 4.6% again

Jun CPI 3.5%
Jun Core CPI 2.6%

As of 14 Jul Cleveland Fed expecting
Jul CPI 3.29%
May Core CPI 2.52%

Jun PCE 3.65%
Jun Core PCE 3.33%
Jul PCE 3.58%
Jul Core PCE 3.36%

[Behappyalways]

US Closes Fiscal 2026 With $2 Trillion Budget Deficit, Pays Record $1.4 Trillion In Interest
https://www.zerohedge.com/markets/us-clo...n-interest

[swakoo]

A reason why sovereign bond yields will likely be structurally elevated.

The Treasury Market’s Power Brokers Are Pickier Than Ever (gift article, link valid for 7 days)

The US government is finding itself increasingly dependent on investors who only buy if the price is right, as foreign governments, central banks, and pension funds become relatively less important.

Private investors, including hedge funds, own about 70% of federal debt and are more likely to turn away if they don't get the returns they want, contributing to a rise in yields.

The shift towards more price-sensitive buyers has made the Treasury market more volatile, with investors like hedge funds able to quickly sell Treasuries in favor of other assets, potentially pushing up the cost of borrowing for the US government.

[weijian]

An informative article by Ray Dalio that put numbers into the US Treasury bill/bond supply and demand equation. Once a upon a time, the Fed purchased treasuries to do QE to squeeze out demand. Now it is purchasing it again as part of "reserve-management" because demand is not enough.

Everything else outside the bond market is roaring now - US GDP growth, employment stats etc, but yet the gov deficit is getting bigger than ever.

The Numbers Behind the Bond Bear Market (with a Look at Equities)

In this article, I am going to walk through how the numbers are tracking the template and show what the projected numbers mean for the future. I warn you that you will be getting a lot of numbers and this is pretty long, so if you’re not a numbers person and you want to cut through this quickly, you should just scan the major points, which I put in bold.

I will start by showing the supply/demand of US Treasury securities, then look at the growing debt service payments and how they relate to tax revenue to show how they are squeezing out spending, then broaden the analysis to include a look at other US debt, then non-US debt, and ultimately the supply/demand of financial assets as a whole, including equities.

The punchline is that it appears very likely that there is and will be much too much supply of financial assets (both debt and equity) relative to the demand for it.

https://raydalio.substack.com/p/the-numb...-bond-bear

[Big Toe]

So far a lot of great minds have talked about US Treasury securities and how it is unsustaunable. The negative outcome is quite clear but the timeline is still uncertain. In short they cant keep increase the issurance without something giving way.

It is almost the perfect storm. The increasing amount of debt/money that is needed to fund the US gov, the AI infrastructure, the 2 wars and military build up. I dont see the US government exercising any prudence whether republicans or democrats. It is inevitable that the USD will weaken significantly to make debt more servicable.

Which is why i try not to hold any USD denominated assets, unless there is extremely good reason to do so.