Bonds Burned

The same remains true

An oldie but a goodie: Bill Clinton’s chief strategist, James Carville, once said that if he were to be reincarnated, he’d want to come back to the bond market. “You can intimidate everybody,” he famously said. We are seeing some of this power now with some tremendous destruction of capital in fixed-income markets. It has the feeling that something is about to break but beware of linear thinking. The FTSE 100 is flattish in early trade, with utilities catching some reprieve and Tesco leading grocers higher, but there remains a negative tone to trading amid the wreckage in bonds.

The name’s Bond...

Bond yields crash higher, and stocks hit hard, looking like an inflection point for markets as rates start to assert a new narrative that has long been touted by central banks. Multi-year highs across government bond yields—US 10yr to a new 16-year high at 4.887%, the German 10yr bund back above 3% for the first time since 2011—we are seeing some terrible destruction of capital in fixed income that is going to produce second-round effects down the line. The 30-year-old bond briefly rose above 5%, and the UK 30-year-old gilt yield has hit its highest since 1998 this morning. These moves are large and rapid, catching many off-side. Japan’s 10-year yield, despite the cap and some further unscheduled intervention, rose to its highest in ten years.

Why are long bonds moving so much?

Jobs data was a catalyst, but this just underlined the higher-for-longer mantra from the Fed. It’s also primarily about deficits and structurally higher inflation, rates, and spending in the West. CBs are no longer buying bonds; they are selling them. This is a mechanistic explanation, but simple and true: someone else has to buy the debt, and there is a lot more of it now. This can only result in lower prices and higher yields. The great bond bull market is dead, and a new bear market is taking over. This is the paradigm shift we have been talking about for at least the last three years. This means stocks are stuck in multi-year ranges—no new highs and the lows are not yet in.

Stronger-than-expected US job data was the apparent catalyst for some of the more aggressive selling, but it’s just an excuse now; the market is dictating things. Jolts job openings jumped to 9.6 million against 8.8 million previously, the biggest surge in openings since 2021. The three-month moving average for job openings held steady at 9.2 million. There were 1.5 openings for every unemployed worker in August, little changed from July.

Stocks slip while USD benefits

European indices were unable to staunch the bleeding early on Wednesday, with further losses on the boards after the Stoxx 600 slipped to its lowest level in six months. The Nasdaq composite slipped almost 1.9% to test the 13k level, while NDX was at its lowest level since June as it made a fresh cycle low after the head and shoulders breach. Meanwhile, USD is steamrolling everything: EURUSD is back to a 1.04 handle, breaking down at the January low support at 1.05. GBPUSD has a 1.20 handle, trading around 6-month lows. Gold holds around the $1,822 level with some aggressive selling already baked in, allowing some pause despite the selloff in rates and DXY at 107. ADP later today, plus ISM services PMI and OPEC have a meeting.

Basic Governance Failures and Market Stress

House Speaker Kevin McCarthy has been ousted by rebel Republicans for the first time in history. He points mainly to the division with the GOP but more broadly at the dysfunction in Washington. The question for bonds is: does it mean a smaller or bigger deficit?

Stress is showing up everywhere.

XLF trend break

Citi—the worst since the pandemic!

VIXX at 20: stocks are starting to look less complacent.

USD is bid with DXY tapping on 107 now and the yen briefly breaching 150 before a seismic adjustment on surely some kind of BoJ intervention—from 150 to 147.3, last trading a little below the 149 level.

Tora tora tora: spot where the BoJ likely dived in.