Bond Yields Have Been Behaving “Normally”
For all the talk about Bond Vigilantes and Operation Treasury Twist (Treasury buybacks which are NOT QE), bond markets seem to be quite rational.
This isn’t a particularly “well-fitted” graph, but the gist of things is that the price of diesel and bond yields seem to move in the same direction, at roughly the same time.
I picked diesel because it permeates the economy more than the price of gas at the pump (and reflects bottlenecks in refining not picked up by the price of oil alone).
In addition to Treasury issuance, IG corporate bond issuance was incredibly strong this summer!
July 2026 – $152 billion. $90 billion in July 2025.
August 2026 – $182 billion!!! August 2025 $112 billion. 2024 $108 billion. 2023 $71 billion.
August 2026 had almost $100 billion more issuance than is typical for August (and we aren’t quite done yet).
Many of the recent issues have been “compute” related, which is important:
- They issue a LOT at the long end of the yield curve. This isn’t “financials” coming at the front end, or the belly, but companies needing and wanting long-term debt to fund their growth plans. i.e. a LOT of duration – competing with Treasuries.
- A lot of these bonds remain within the hedge fund (or spread-based community). The “long-only” money tends to buy on yield. Direct competition to Treasuries. The spread buyer often shorts Treasuries (or Treasury futures) against their bond holdings. (I’ve been advocating that even spread buyers take both the yield and spread risk by owning compute bonds without a rate hedge).
- This creates “what looks like a large short interest in Treasuries” that isn’t at all a directional bet on Treasuries. Investors trying to capture spread tightening wind up being short Treasuries (or Treasury futures), but that isn’t a “short base” that is “easily squeezed” because they aren’t betting against rates; they are merely hedging their rate risk in the “primary” risk they are taking – “compute” or more broadly “credit spread” risk.
Where others are seeing “Bond Vigilantes,” I’m seeing a market that seems to be reacting “normally” to some inflation pressures and far more importantly, to the immense supply of long-dated bonds, competing with each other for investor money!
Ahead of Warsh tomorrow, you can catch up on last weekend’s Treasuries, Treaties, and Treatises and Treasury, Treasuries, the Fed, and Iran.
While older, it is possibly more timely – I hope that Warsh Takes His Mark Antony Moment tomorrow!
Two things I don’t want to get buried are:
- Fully on board with trying to monetize our gold holdings to help with the deficit and debt burden (while simultaneously likely hurting Iran).
- Increasingly hopeful that we could see Crypto Privateers (we published on that last summer) as part of our efforts against Iran and any crypto holdings they have!
Tomorrow should be interesting! We are on Bloomberg TV tomorrow ahead of Warsh, and get to kick-start next week early Monday on CNBC where there should be no shortage of things to talk about!
Have a great weekend (due to “prior commitments,” we might not be able to publish live on Warsh’s speech, though we will try).
