美债收益率创2004年来新高，拍卖遇冷与通胀预期推升波动

This really is more like what interest rates should be and what interest rates historically have been. Right? So when you go back and you look at the forever history of interest rates and benchmark interest rates globally, they're usually between 3 and 6%, right? So where we're still within well within that range, we're just not used to it because we've had a whole generation of effectively zero interest rates. And that's just not the case anymore.

Um, now now that being said, I do think and Paul, I think this is to your comment about today's market move and certainly yesterday's eye popping market move as well, is that sentiment is just so bad, right? People don't want to take a step in and buy this market yet because they don't know where it's going to end up. Um, now there's some important technical levels that we can talk about. But at the end of the day, until everyone has some clarity as to what's going to go on with the war, will we have some type of fiscal restraint?

Um, all of these things. And I'm not only talking about the US, I'm talking about globally. Um, you're likely to have some people who are going to be a little reluctant to buy government bonds. Absolutely. Until last week's rate hike, IRA. It was really questions about the Fed's independence and inflation credibility that drove this bond selloff. This week. We have data on a hotter than expected U.S. economy that's sinking bond.

So talk about the confluence of factors that's driving rising yields. Well it's still some of the fed to write that now that we're out of the quiet period. And after the fed meeting last week, you now have members of the FOMC coming out and saying, hey, we haven't seen a lot of progress on inflation. Well, that sounds pretty hawkish. So of course you're going to have, you know, somewhat higher interest rates and thinking, you know, how high is the Federal Reserve going to increase interest rates to now.

You know the market now is pricing for 100 basis points of interest rate increases over the next year. Um, it will those be realized? I think, you know, there's obviously a lot that can go wrong, but you'd have to think that the market is going to remain on edge until we have answers to those questions. I think Kevin Morse did regain some credibility right, in the fact that he did hike. He did say, um, look, because inflation is not yet at our level, we're going to do what it takes to get inflation lower.

So hiking gave them some credibility, but now they have to continue to maintain that credibility by actually following the market path, at least to some degree, without having any forward guidance. Okay. Also, auctions are big news now, right? Because we had a five year auction yesterday, it was a second worst ever by one measure. And I thought people liked the belly of the curve. Um, we have a seven year auction today at 1 p.m., and we know there's only going to be more debt issuance going forward, especially at the shorter end of the curve.

So have U.S. Treasury auctions become kind of an event risk? Yeah, I think they well, they are an event risk. And you know, we always we look at them every single time we have one of these auctions from the two year to the 30 year because they're usually pretty boring. But when they're not, they're really not like yesterday's five year auction. You know what's interesting, Scarlet, is you mentioned that, you know, yes, we're issuing a lot of debt, but we haven't we actually have not increased the amount of long term debt that we've been issuing on a gross basis since 2023.

So it's not like it's not like there's a lot more debt being issued. And in fact, on a net basis, there's less being issued because, you know, a lot of this other debt has been been rolled down. But what what I think is important here is that people don't know what the end state of, um, the Fed's actions are going to be and how high inflation can remain. So with those two factors in there, people just, you know, they didn't show up to the auction like you said, depending on how you cut it.

It was the worst auction since either 2022 or 2020. But it was bad, right? It was it was it was great. All of these auctions and it had the lowest grade that five year auctions had since 2022. Wow. Look at you, tough grader out there. All right. What what can turn things around, Iris? I mean, if what can turn things around here in terms of the sentiment that you were mentioning? Yeah, I think number one is there could be a recommitment from, um, from the Federal Reserve to actually squashing interest rates.

I still think there's a little bit of, of worry out there that they're not going to be able to get inflation down. Um, and then secondly, you know, and this is kind of an interesting thing. I suspect that once we get over the election, uh, people will, you know, look at some of the data and say, okay, what tends to happen with deficits when we have a split government? Because it does look like the Democrats are going to take at least one of the houses of Congress.

And actually, deficits get better when we have split government. So we put out a note about that a couple of weeks ago, just noting how every single time we've had a split government, with the exception of Covid, right, that was, you know, very unusual situation. But outside of that one example, over the following couple of years, would split government deficits go down and I think an improving deficit. And then obviously if we get a slower economy, you wind up with, uh, with yields going down.

But look, I'm not I'm this isn't good for total returns for bonds. But I'm not panicked about the bond market. It's not like the it's not like we're where we've moved the market away from fundamentals. Right. Fundamentally we should be here because the growth is good and inflation is still, you know, tuition at two and a half or 3%. And so we're fairly priced on a fundamental basis. So you look at volatility in bonds.

It's now at the highest since March. That's the move index. Do you think that the rising volatility is turning off investors who wouldn't ordinarily be drawn by by these big yields. Well maybe a little bit. But you know generally speaking you know remember the move index is short term volatility. When you look at longer term volatility like one year ten year, which is where like mortgage investors and a lot of uh, a lot of people, um, you know, kind of hedge their longer term risk that hasn't risen nearly as much.

It's risen, but not not nearly as much as, as short term, uh, volatility has. And uh, yeah, that's one of the reasons you're repricing. Right. So when you see higher realized volatility you have to price for higher um uh, higher bond yields just to compensate you for that excess volatility. So that is part of it. But it also you know that's a feedback loop right. Where you get more volatility you get higher yields. You get higher yields.

You get more volatility. Where does that end. And I think that that is probably more of the question that a lot of people are asking themselves before they dip their toes into and start to buy here.