The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Treasuries are testing
The bond market isn’t respecting the announcement by the Treasury Department. Treasury yields climbed across the curve again today. At points intraday, all of yesterday’s move was undone. Crude climbed across its curve as well but it is unclear if crude is influencing the Treasury curve. Regardless, US stocks were negatively influenced by both markets. The S&P 500 opened the session down only about 10 points but the tape traded heavy and sank consistently over the day. Lows of the day printed at the close, a bad technical sign. Counterintuitively, capital flow was light at 80%.
The major topic of the moment is that the bond market is pushing yields higher. It is a bad sign that the market took one day to reject the signal that Treasury sent. The market thinks yields should be higher (rightly or wrongly) and it is ignoring what the Treasury Department has just signaled. The question before us is whether the Treasury will try to fight the market.
A fight would be bad. The Treasury cannot win if the market has conviction. We don’t know how much conviction the market has though. For the sake of less volatility, the Treasury should just say nothing more and do no more than what it announced. If rates climb further, so be it. Let the market figure out if they’ve taken yields too high. Or let the market be content with higher rates for a while. The economic conditions of the US/globe will result in proper rates over time. There is no need for Treasury to attempt to steer things.
If the Treasury tries to defend some rate level, things are going to go badly. Maybe inflation really is the key issue. Maybe as cooler inflation data publishes, the market will come around and lower rates. That would be the best-case scenario.
What if inflation comes out hotter? No amount of Treasury jawboning or actual bond-buying will stem the market’s selling in that case. The Fed will have to stomp on the economy with higher rates to kill inflation. That path will be bad for bonds initially, bad for the economy, and bad for stocks.
There’s an even worse scenario than that. What if issuance, not inflation, is the real concern? There’s no data that will come out that improves that situation. There’s no amount of Treasury bond-buying that will hold back the market in that situation. And the worse part is that there’s no Fed reaction that can reset things either. The Congress and the President will have to act. And they don’t act quickly. And they don’t act pre-emptively. The financial wreckage has to happen first, and be awful enough, for them to act.
That’s bad across the board.
The stakes increased yesterday. The constructive way through is to hope that cooling inflation satisfies the bond market.
All other paths lead to problems.
See you tomorrow.
-Mike
Visdom Market Commentary
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