The 6 Billion Dollar Man
Yesterday, the Treasury announced their planned repurchase of $6 billion of bonds on their longer-dated buyback operations. The 30-year bond spiked from 5.25% to 5.31% and is hovering just above that level right now.
As we discussed in I Am The House Now, the Treasury Secretary’s approach to yen intervention has been more aggressive than any attempts so far to lower longer-term bond yields. In fact, many were expecting as much as $10 billion, so the ensuing sell-off makes sense. We continue to believe the major headwind facing Treasury yields is the Global Supply of Duration. Not just the supply of bonds, but also the longer average duration/maturity of such issuance.
Rising oil prices are not helping the rate market either. Academy’s SITREP on the situation yesterday, U.S. Strikes Iranian Oil Tankers lays out Academy’s Geopolitical Intelligence Group’s current thinking on the subject. It isn’t helping matters that Ukraine is taking steps to reduce Russia’s ability to not just ship oil, but also to refine it. Diesel is finally coming to the fore as being the most crucial price to watch for problems in the energy ecosystem and a key source of widespread inflation (shipping, industrial use, and importance to agriculture). From a global ProSec™ perspective, not only has Australia approved their first refinery in 60 years, and spent more on oil exploration this year than in the previous 10 years, but they have also started to ease restrictions on fracking.
But let’s get back to the $6 billion dollar man! I really wanted to insert some “bionic” soundbites here, but could only find YouTube clips which get blocked at many places. I also am now stuck with “We can rebuild him…Better, stronger, faster” in my head (I need to find a song soon to swap out with that). I do think Oscar Goldman would be a cool addition to Academy’s GIG. 😊
We had some “charting issues” this morning, so this is the best we could come up with.
Warsh and the Fed did not help rates on July 29th (their last meeting date).
Warsh did not help with his Jackson Hole speech on August 28th (which I continue to argue was a missed opportunity).
Bessent initially helped 30 years on August 19th. His help faded, then bounced (though things seemed “better” in Iran back then). Since then, we have seen yields drift higher.
The 10-year Treasury, which translates into mortgage yields and is therefore more important to most of America, was at 4.74% prior to August 19th. It got as low as 4.62%, but has marched steadily higher, trading at 4.87% (more than 10 bps above when the increased buybacks were first touted).
So far it has been “correct” to fade the Treasury’s efforts to support longer-dated bond yields. Until we see a “whatever it takes” moment, that is likely to be the correct trade.
However, I’m probably closer to neutral here:
- Positioning has flipflopped from short, to too long, to probably a decent mix again. So, it should get more difficult to move yields higher.
- While IG issuance has been big, it was planned for and may even disappoint this month, as so much debt was issued in August (this Friday is likely to be quiet and we tend to have very little, if any, new supply on Fed days).
- I Am the House. Bessent has not been afraid to do more, so we might see headlines from him in the coming days to try to accomplish his goals (it looks “meh” on 30s so far, and worse than “meh” on 10s).
- Will Warsh yet again deliver a message that causes yields to move higher? At the very least you would think he is crafting a speech that can help the long end? (Though I’m not sure how he can do that without sounding too hawkish, which is unhelpful in its own set of ways).
- Will CPI come in hot? Or will we get a pleasant “surprise” on inflation tomorrow?
I don’t think the intervention, as it stands, will work.
Having said that, any move to higher yields is unlikely to be a one–way street, and I think we could see a little relief rally in 10s in the coming days. In the words of the Dead Kennedys’ “I fought the law and I won”. Time to be cautious fighting the admin on their desire to see lower yields out the curve.
My two biggest fears from the short side, are that IG issuance slows down enough, relative to the hype, that it takes some pressure off of global bond yields. Follow that with my hope that we see a nice surprise on CPI.
