The Treasury market looks like it’s determined to find the breaking point for risk assets. US long-dated yields have been rocketing higher since taking out the big 5% figure but that hasn’t undermined stock markets yet, or even gold. At some point that will change as ever-higher yields compete with equities for capital.
Today, US 10s are up 8 bps to a high of 5.35%, which is narrowly below Monday’s post-GFC high. Further out, US 30s are making a new 24-year high up 7.4 bps to 5.72%. A crack of 6% in long bonds would undoubtedly crack a few spots in the economy, especially housing (which is already badly struggling).
Recently, there was a brief respite in borrowing costs as economic data downshifted in the past 10 days with softer non-farm payrolls and the weak S&P Global services PMI but while that’s curbed Fed rate hike bets, it hasn’t stopped the rout in bonds. It’s gotten so bad that Treasury Secretary Scott Bessent put his tail between his legs and tried to walk back his ‘I’m the house, bet against me if you want’ talk.
Borrowing costs trickle down into everything but it’s increasingly clear to me that something needs to change in a macro sense to arrest the move.
- 1) AI capex is extreme and that’s soaking up available dollars. Today, SpaceX announced another $40 billion for Nvidia chips.
- 2) The US fiscal picture is nowhere close to sustainability and there are no credible Congressional voices pushing in that direction.
- 3) Trump’s promise of $5000 checks isn’t going anywhere but that kind of talk undermines any future pushes towards fiscal restraint, if anything, the opposite
- 4) US military adventurism is expensive
- 5) The Iran and Ukraine wars are in costly stalemates that will continue to push inflation higher until they end
- 6) The Fed appears to be determined to do the minimum it can to credibly fight inflation, which risks putting them behind the curve
- 7) The market may be seeing AI as inherently destabilizing fiscally and politically, opeing a pandora’s box of costly social supports and creating turmoil.
The last one particularly frightens me because there is no reversing it, and the recent battle to slow it down has been seemingly abandoned. We are going full-speed towards wherever AI takes us and I strongly suspect it will be governments holding the bill in one way or another.
This article was written by Adam Button at investinglive.com.