Lots of Bad Stuff all at once, topped off by Trump’s $1.35 Trillion Free-Money Promise, $5,000 for every adult American, at the worst possible time.
By Wolf Richter for WOLF STREET.
The bond market has been digesting a slew of intense problems, and long-term Treasury yields have already been surging. At the top were: Inflation refuses to go back into the bottle and keeps getting nastier; and the fiscal deficit – projected at 6% of GDP in 2026 for the fourth year in a row despite a growing economy – needs to be funded with new debt sales of $1 trillion every 3 to 5 months.
So this is a precarious situation, and to manage that debt under these conditions would require a steady thoughtful hand at the Treasury Department and in the White House.
But instead, we have at Treasury a hedge fund manager who is playing currency casino one day – “I’m the house now,” he said – and magician the next day, amusing us with his hocus-pocus shows to push down yields, such as the hocus-pocus show about Treasury buybacks.
To his credit, Bessent also talked about focusing on “fiscal consolidation” a few weeks ago, and they were going to work on something, and they were going to come up with something like in a week or so, but that was scuttled, and now any talk of fiscal consolidation would have to wait until after the midterm election.
But that effort at fiscal consolidation got wiped out entirely with a few words by President Trump. In his speech yesterday at the Republican convention in Dallas, he promised $5,000 to every adult American “if the Republicans win” the midterm elections and remain in control of Congress.
So let’s do some math here. There are 269.76 million adults (age 18 and over) in the US, according to the Census Bureau’s latest estimates. So stick with me for a moment. The Republicans win and remain in control of Congress, and the tab comes due: $5,000 for each of the 269.76 million adults, so the tab for that is, let’s see, hmmm, $1.35 trillion with a T that the US government doesn’t have and needs to borrow.
So already, the government needs to sell $1 trillion in new debt every 3-5 months just to fund the current deficits. And now on top of that, it would have to sell $1.35 trillion in additional new debt to fund this “Trump dividend.”
The bond market – the buyers and sellers in the bond market, and the investors sitting on the fence waiting to buy when yields are high enough – can do that math too. And they did.
In addition, the bond market is thinking: Wait a minute, that $5,000 is like all three Covid stimulus checks combined, all at once. When money is free, prices become meaningless. People will just pay whatever. And sellers accommodate them. And inflation takes off. All this free money that the government threw out, first under Trump then under Biden, helped trigger the worst inflation in 40 years, and bond holders got crushed by the loss of purchasing power and the plunge in market value, and now Trump wants to supercharge the free money inflation circus all over again?
So the buyers and sellers in the bond market are thinking: Trump might just blow up the bond market, sacrifice it at the altar of the midterm elections. And the buyers wanted to be paid for this risk, and the sellers tried to get rid of their holdings, and as a result, Treasury prices fell, and yields spiked across the board today, on top of the increases yesterday.
The 10-year Treasury yield spiked by 14 basis points today and by 19 basis points so far this week, to 4.97% at the moment, the highest since the intraday high on October 23, 2023, when it went briefly over 5%. And before then, the highest since July 2007.
This is quite a majestic spike. Yield spikes create demand by pulling investors off the fence. And generally, that’s the end of a yield spike, at least for a while. And it seems, the buyers would start coming out in droves and buy and push the yield back down. That’s what happened last time when it hit 5% on October 23, 2023.
But if too much chaos and uncertainty keep more investors on the fence to watch from a safe distance, the yield could continue to head higher. Bond bear markets are brutal and can last a long time. Investors have learned the hard way to be careful. 5% here we come?
The 30-year Treasury yield jumped by 9 basis points today to 5.37%, the highest since July 2004, having edged past the June 2007 high (5.35%).
At the 30-year Treasury bond auction this morning, it took a yield of 5.308% for the government to sell $22 billion of 30-year bonds, the highest auction yield since August 2001. In the secondary market, yields then continued to rise. There was strong demand at the auction because higher yields attract demand, but that was the yield that it took to sell all $22 billion of bonds.
The current yields may seem attractive in a vacuum, after 14 years of financial repression, and they’re inducing investors to come off the fence.
But to this observer, those long-term yields are just now back to a normal range, after 14 years of financial repression. Inflation is high, and the Fed seems unwilling to tackle it, but seems comfortable with it in the 3% to 5% range as a way to manage the debt (on the theory of letting the economy run hot). The government’s fiscal situation is precarious, with Congress unwilling to deal with it, and with the White House going all out to make it even worse.
The bond market could throw a real hissy-fit if buyers and sellers get frazzled about inflation, the casino-style debt management, the magnitude of the onslaught of supply generated by the horrendous fiscal deficits, and the curveballs that the Administration is throwing at the bond market. To this observer, those risks would require a substantially higher yield to make long-term Treasuries attractive.
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Reality deflector shields are up in this White House. I think the bond market is under-reacting. The rest of 2026 and 2027 may be a doozy. Hold on to your hats (and cash for what that will be worth).
IMHO – The root of the problem is that Congress gets a lot campaign funds from companies that benefit from tax breaks that Congress writes into the law.
The $5000 payment helps balance some of the wrongs visited on the little people for decades.
Yeah, 2 wrongs don’t make a right, except in economics, which is the dismal science.
Why don’t they just give us the $5k now then, if it’s because we’ve been making so much money and doing so great? They’ve got the power now, so if they think it’s the right thing to do, as you think it is, why not strike while the iron is hot?
Obviously because Republicans are polling poorly coming up on the midterms and they’re not sure if their attempts to disenfranchise people through things like the SAVE act, having USPS not do their jobs and deliver mail in ballots to select states, and having states like Texas redistrict at unusual times to further gerrymander political districts will give them enough of a boost to cheat to win and keep control of Congress.
So instead of doing the honorable thing and being better public servants, they figure maybe it’ll just be easier to bribe people to vote for them. Its utterly shameless behavior.
And for anyone dumb enough to believe that they’ll actually get their checks after the Republicans win, what nice things did you buy with your checks we were promised from all the money DOGE (didn’t) save us? What about those beautiful tariff refund checks we all got?
As Ted Cruz famously said about Donald Trump …”the man lies as easily as he breathes…”
You won’t be getting those checks, any more than you’ll get anything more than “concepts of a plan” about how to deal with health care costs or a ceasefire in the Iran war.
You have to be a fool to believe anything Trump promises.
of course if we could only STOP the fraud in medicaid, obama care, somali daycare
or anything with ‘care’ in it
we could balance budget
but the demmie protectors go ballistic when we get close
and grifters in CONS gress refuse to provide audits/over sight of any funds
might as well get audit of military – we all know how RINO’S love it when there’s no accountability of funds
it’s funny money and is being issued FRAUDULENTLY and therefore null and void – issued with NO INTENT ON PAYING IT BACK
I had 5.3% on the 10 year as resistance for a couple of years, I was planning on buying at 5.2% to front run a bit. An article from this past weekend in Barrons spoked me; “ Consider that an investor who bought a 10-year Treasury note in 1970 was able to lock in an 8% annual yield. But when the principal was returned in 1980, it had lost half its value to inflation.” Scary to think about. History has been known to repeat itself.
This is a gross exaggeration, so I’m not grief stricken over all of those 1970’s era bondholders.
First of all, the 10-year yield in 1970 was 7.3%.
Using historically observed Treasury yields, a $1,000,000 investment path (10‑year Treasuries starting 1970 @ 7.3% → reinvest interest into 5‑year Treasuries in 1975 @7.8% → reinvest interest into 1‑year Treasuries in 1979 @9.8% → cash out everything in 1980) would end up at roughly $2.1 million in nominal 1980 dollars, which corresponds to about $0.98 million in real 1970 dollars after adjusting for CPI inflation.
So, the investor in T-bonds essentially got his money back, to within plus or minus 2%. What do you expect for an essentially “riskless” asset. I think, for a defensive investment aimed at capital preservation, this turned out pretty well.
So: not so scary. You just need to run the numbers. Which you didn’t do, did you? It’s easier to pull your opinions out of thin air.
No not at all, I read a sentence in a Barrons article(and they rounded down). :) Thanks for sharing! I will feel like schmuck if I buy at 5.2 and the 10 years goes to 7% in 18 months. The decade old bull market in bonds is over and the bear market in bonds is alive and will be here for decades. At 5.3% stocks should get crushed and money should flow back into the 10 bringing it back to 4.7 or 4.5 at least temporarily. Yeah, I am swinging at 5.2% just a smaller swing.
Everything is from the gut, not thin air. Good microbe or conscious contact :) life is good! I am superstitious, when we listen the universe is always speaking telling us what to do, really non of this matters in the end or the beginning or in this moment :)
Cheers thanks for taking the time to share a pro forma of time and money.
Yes, MATH matters. Higher interest rates will bring prices down, or should in a truly free market.
The world has survived 15% interest rates, and will again. Time to get back to basics, reward good behavior and smart management. Punish bad behavior etc.
Shouldn’t you subtract income taxes from those annual interest payments? Does that put you far in the hole in your example.
Great point Bobber!!! Maybe that’s how the Barron author calculated real value post inflation after 10 years. Municipal bonds yield are rising too, their is always that! Saudi pipeline to the Red Sea goes down for any length of time….global inflation goes parabolic even with demand destruction.
Good point.
There are some caveats. My understanding is that foreign holdings U.S. Treasuries are exempt from IRS income taxes. Bonds held by foreign central banks (for example) are tax free income for those banks. So, in this example, countries who recycle trade surpluses back into Treasuries basically preserved their capital between 1970 and 1980. Those were the good old days when markets trusted the U.S. as the mostly benign free-trade Hegemon that it was.
As for U.S. investors who are taxed on interest, such taxation applies to any bond, Federal or Corporate. With Corporates you take a little bit of risk for the additional yield, and that gets taxed too.
Some economists (probably most) say that investors factor in the taxes when they buy the bonds, so they are really bidding on an after-tax equivalent rate (whether they are taxed or not). Treasuries have intrinsic value for many investors besides the interest rate — historically less volatile, more liquid, usable as collateral, etc. — and this affects the market clearing rate.
For these reasons the market clearing interest rate may have (in the past) systematically under-value inflation risk. But the interest rate today may embed risk premia that weren’t significant in the past — sanctions risk, tariff risk, exchange rate risk, Bessent risk, Warsh risk, Trump risk….
“…that foreign holdings U.S. Treasuries are exempt from IRS income taxes.”
ALL foreign holdings of any US assets are exempt from IRS income taxes – but they’re not exempt from their local taxes.
A Japanese person living in Japan can own US stocks, Treasuries, whatever, and not pay taxes to the IRS. Why should they? The US is not their country. But they will pay taxes to the Japanese MOF. Same when Germans living in German invest in US stocks, Treasuries, etc. They do not pay US income taxes on them, but they DO PAY German income taxes on them, and possibly out of their nose.
So now you can throw your entire theory out the window.
I checked a total return index for 10 year treasuries. They have similar numbers, but say that real return on 10 year treasuries from 1970-1980 was -12% or -1% per year, with most of the drop happening in the last half of 1979.
You could engineer a “worst case scenario”. Real total return from 1972 to 1982 was -37%. 10-year yield dropped back down to 6% by 1972, and made it 14.6% by 1982, and that decade saw inflation of 129%. So you made 44%, but after adjusting for inflation you lost 37%.
But that’s the worst in post-Fed US history, just barely worse than 1941-1951 (-33%).
I should also add that if you gutted it out, you made all your money back and more from 1982-1986.
Thank You! Plus thanks For being kind and respectful in your tone of communication . I appreciate your time that you spent looking up an answer, Without any insults or throwing shade. Kindness is always appreciated :)
If you think both yields and inflation will come down, go for the longest duration STRIPS available.
We also now have TIPS, which weren’t available during the Volker shock. I wonder how high real yields would have gone back then.
Have faith. The Fed will come to the “rescue” at some point. There’s always a can that can be kicked until AI destroys us all and then we don’t have to worry about paying back any of the debt.
Wait, Global Warming, was predicted to destroy us all before AI came along. By their predictions, we should not live out this decade…
The ai risk is real. Why humans want to make something smarter than themselves is beyond stupid.
If you read Nick Bostrom’s “Super intelligence” which once was considered one of the best written on how we would control AI you would see the naivety of it all.
I work with it everyday and the newer “smarter” models seem worse at following instructions because they’re trying to think versus just do what they’re told.
I think the odds of an ai apocalypse are like 10% as they’re saying in the news, so not high, but too high for my liking. That’s about the same odds as dying base jumping
Who predicted global warming would kill us all before AI came along or by the end of the decade? Any serious climate scientists or just strawmen you invented to take a shot at?
Climate change already increases the cost to insure homes in fire prone and hurricane prone areas. Severe drought and persistent extreme temperatures in the Midwest helped encourage ranchers to trim their cattle herds in 2023, contributing to high beef prices now, and warmer temperatures have encouraged the spread of invasive species into colder climates, leading to increased costs to farmers, forester and other people affected by them to deal with the issue. It will all get worse as the climate irrevocably warms past 1.5C and into the 2-3C range that it will reach by the end of the century at the current trajectory.
You could choose to read any of the IPCC reports if you actually wanted to educate yourself instead of inventing strawmen to argue against.
I don’t want to leave a crappier, more expensive and more difficult to thrive in world for my children, nieces and nephews and not for other people’s children either. They deserve a chance to thrive just like we had.
The “F you, got mine” attitude so many Americans display is one of the most disgusting attributes about many people in our country. Its why we can’t work together on anything, why we run perpetual massive fiscal deficits instead of taking the painful measures now to fix the problem, why we ignore climate change, poverty, increasingly extreme wealth inequality, lack of adequate healthcare and so many other social ills.
A video I watched recently made a solid argument about how the Fed raising rates might not be enough to solve inflation. At least not in the same way it did back in the Volker era. This was because most of our inflation currently is coming from the “fiscal dominance” environment and driven by government spending. Bank lending is not currently at an all time high or anything.
I know less and less every year but I wonder if this is the reason why the Fed is slow to move?
Also the premise itself is scary. If the Fed loses it’s ONE tool to fight inflation, how screwed are we?
It’s not just the Fed that fights inflation. It’s also millions of people who get squeezed and decide they aren’t going to spend because they can’t afford it.
The Treasury not terming out rates during COVID means that the billions of bills and bonds coming due each year will have to be refinanced at much higher rates.
This could get ugly quick as interest expense as % of GDP is already spiking.
Why did the government not do like every other smart company and term out their maturities by at least a decade? Amazon issues 40 year bonds in 2021. Genius
Treasury yields surge toward danger zone for stocks, as inflation pressures heat up…
Likelihood of Fed interest rate hike next week just got lot higher…
Casinos, magic shows and now the circus.
I’ve got dry powder to buy GOVZ and will start to DCA if it goes to $26 to wherever it bottoms out.
I have been watching the saw-tooth Bond rates for a while now. It is almost like you can see when some “hocus pocus” was executed.
But today, I was expecting the “hocus pocus” to happen, but if it did, it had zero effect.
I wonder if Bessent has given up?
I have to respectfully disagree. I’d offer that promising to conjure $1.35 trillion with a T to purchase an outcome in single election qualifies as hocus-pocus #4. Even if it isn’t intended to push down interest rates, it sure is magical. Or maybe we give it a different name, like “abracadabra #1”
And it didn’t have zero effect. “Ooooh! Aaaah!” was the effect as bond yields rocketed skyward like fireworks.
MW: Treasury yields surge after Bessent’s beefed-up buyback operation fails to calm market
When the Bonus Army marched on DC in 1930, they were met with tanks and machine guns because of fears payment would exacerbate inflation. This Trump bonus won’t happen; he will find someone to blame but he will have captured Congress.
It’s highly unlikely he captures Congress.
Are you talking about the Congress he already captured?
The bond market may have had a cow, but prediction markets barely budged at Trump’s $5k promise. The House is still heavily favored to flip, and the Senate is in tossup territory. If you think the Trump promise is sure to work, then they’re giving away free money on Kalshi and Polymarket.
Wow! This all seems so surreal. The sitting president offering a “reward” to all adult citizens to vote for a particular party. The Treasury Secretary of the most influential country in the world stating: “I am the house”.
Am I the only one who is shocked by all this?
Oh, and by the way, “The 30-year Treasury yield jumped by 9 basis points today to 5.37%, the highest since July 2004, having edged past the June 2007 high (5.35%)”.
I was an institutional bond investor in 2007 and could tell you some crazy stories about that year in the bond market.
This could get ugly………..fasten your seatbelts.
It’s the same president who famously tried to overturn the results of a previous election. A person’s capacity for shock seems to be a finite resource, one that has run out for many some time ago.
someonetwo,
I have recently been reminded of when Republicans used to be able to field real statesmen like John McCain, who I don’t agree with entirely politically, but I would without a doubt still sleep soundly with him in charge.
McCain actually served his country, and wouldn’t have gotten us into this absurd new forever war with no exit plan we’re in with Iran. He would have chosen competent military leaders, and definitely not a Fox News news reader for his head of DOD. He wouldn’t have wasted time with DOGE, would have nominated actually competent leadership to work under him instead of sycophants, wouldn’t have made a million promises he had no intention of keeping, wouldn’t have tried to take powers vested in Congress for himself, wouldn’t have been more worried about golfing and engaging in endless vanity projects like a ballroom, renaming things and an arch than the war with Iran that’s going badly or the domestic situation at home. He wouldn’t have tried to interfere with the independence of the Fed, he wouldn’t have even joked about running for 3 terms or overturning birthright citizenship or threatening TV stations with enforcement action from the FCC if they air an interview with Jimmy Kimmel and the Democratic challenger for governor of Texas etc, etc, etc.
Nothing about this administration is normal. Its something I would expect to see in a country like Russia.
Worse still, Republicans in Congress just enable this kind of behavior. Its a pathetic dereliction of their duty. Absolutely spineless behavior and absolutely abnormal compared to any other President and Congress in history.
I would take President Camacho from the movie Idiocracy at this point, at least he knew enough to appoint the best and brightest public servants and showed he cared about his people. That’s someone you can actually work with.
Paul Krugman, who, although he has been wrong about some important things like transitory inflation after Covid, can still have good insights once in a while, had a pretty funny comment. He said you can have morons in charge for a long time without anything breaking, because the system has its own inertia and most people just continue to do their jobs. But, eventually, the morons will break something important. He was talking about Turkey at the time. Erdogan got the central bank to cut rates when inflation was at 80%. But the lesson applies to us, as well.
Paul Krugman is the “Master of Morons”. The Japanese will ultimately regret taking his counsel twenty or so years ago.
–Geezer
Paul “Fake Nobel Prize Winner” Krugman is the guy who a few years ago seriously proposed minting a one *trillion* dollar coin to solve the debt problem. How does anyone take him seriously after that?
This mischaracterizes this, though the idea was still silly. The $1 trillion coin was not to solve the debt problem, it was to avoid the incredibly stupid debt ceiling rigamarole that paralyzes the government every year or two that does absolutely nothing to rein in spending.
The term is: Drift into failure – Gradual organizational decay that stays hidden until something breaks. With a side of Peter Principle and Murphy’s Law.
Kansas is going bye bye…smell that reality as the script breaks at every seam…
Biden did essentially the same thing at $2k per vote….to elect Ossoff and Warnock. Corporations typically buy Congressman and bureaucrats…
Maybe it’s J6P’s turn?
I wondered which way the cultists were going to make themselves look like fools pretzel twisting themselves trying to defend the indefensible. I knew it was going to happen, I just wondered how.
Thanks for the insight.
JimL, you said it better than me. My mouth was agape for a few moments after reading and rereading that comment. Utter bewilderment how certain conclusions are rationalized.
My hope is that the market forces—no, demands—changes in congressional and presidential behavior. And good behavior for that matter.
Is it cultist to acknowledge that Congress and Presidents have no desire to change what is happening? It should be fairly obvious to most that we can play tennis all day by cherry picking inflationary legislation by both parties that continues to be passed by both parties in Congress and signed by Presidents from both parties. To deny that is cultist.
remember when Biden posted this gem of economic brilliance on his own social media network that he sold high speed access to for traders? its grifters all the way down.
“Great jobs number just announced, breaking all estimates (except mine!) by double and triple – And you haven’t seen anything yet! EMPLOYERS ADDED 162,000 JOB IN AUGUST. Lower the interest rates because the U.S.A. is a much stronger credit than it was just a short time ago! A STRONG COUNTRY MEANS A LOWER INTEREST RATE – IT’S A BETTER CREDIT…Very simple! We should have the LOWEST RATE of any country in the World, like “the old days.” Without the United States agreeing to allow them their big surpluses, and we could stop that immediately, they would no longer be considered financially ELITE! LOWER THE RATE OR I’LL STOP TRADING WITH COUNTRIES WITH WHICH WE HAVE A DEFICIT, which the U.S. Supreme Court, in its ridiculous and very costly Tariff decision, strongly acknowledged “the President” has an absolute right to do. IT’S BETTER THAN TARIFFS! The Fed Board, with its great new leader, must get smart – BE PATRIOTS for a change. High interest rates put the U.S.A. at a very unfair disadvantage, and I won’t allow that to happen! President DONALD J. TRUMP”
Trump started the PPP grants, the lock downs, the first $3 trillion of extra Covid money printing.
Even one of his greatest achievements, Operation Warp Speed, to fast track a covid vaccine was something he later turned on and spoke out against. He was for masks, then against them, for lockdowns, then against them when he thought it would hurt his reelection chances.
Its the same bullshit all over again, just with a different flavor. This time its not a pandemic, its a war against another country he can’t win, thats not a war, but is, but isn’t.
Same as the Schrodingers payouts that aren’t, (DOGE, Tariff, if you vote how I demand).
He’s a terrible statesman, terrible businessman who has declared multiple bankruptcies and a duplicitous grifter typical of a nepo baby who never had a real job because of Daddy’s name and money. He’s stiffed contractors and banks.
On top of that, neither he nor anyone in his family could be bothered to serve their country at any time they were citizens here.
He’s a disgusting parasite and so much worse than Biden or Obama or anyone else you want to deflect to and the way he’s enriched himself through Truth social, various crypto scams, payouts for pardons, his $400M Qatari jet that goes to his personal museum when he isn’t President anymore. Jimmy Carter divested of his peanut farm for bucks sake and this guy won’t even let us see his tax returns, like every other President has, except for him.
He’s a banana republic dictator in human form and a disgusting parody of a human being.
It feels like living in the movie Ideocracy
I listened to a guy tell me he was buying a house the other day because it would 10x. He was trying to give stock trading advice because he’s an expert from watching all these US day traders living on the “Island of Costa Rica”. What was concerning was this was an educated individual with an accounting degree. Lol.
Just pointing out that it’s spelled Idiocracy, as in idiocy, and not Ideocracy, as in ideology.
Quite the amusing thing to misspell.
Maybe a Freudian slip? Ideology is the pathway to turning your brain off and following a plan without critically thinking it through. Ideocracy and Idiocracy are one and the same.
If we’re going to do the whole hyper inflation thing $5000 won’t be enough to buy jack soon, should make it $10k at least!
And maybe make it monthly too for good measure.
This $5,000 is a good start, lets see if the parties and maybe new ones can compete ($) for the vote. Just print the dollar value of a vote right next to the candidate’s name on the ballot. Make that voting machine like the supermarket coin counting machines and print out a cash receipt.
Exactly! I want to hear the counteroffer from the Democrats. Lets go! What could go wrong…
The bond market, which doesn’t appreciate being trifled with, is showing Bessent who the real house is. Stock market traders think they run Wall Street until the bond vigilantes wipe out 5000 points on the Dow with a snap of their fingers.
A channel of trend lines on the 30yr bond yield chart looks to be at the low end.
“To this observer,” Wolf has joined the Bond Vigilantes.
In style, of course!
How about Warsh shocks everyone and lowers rates…..is this possible?
Of course. Everything is magical now. If we want something, we don’t make it or build it anymore. We conjure it.
The correct term is “manifest”. get with the program.
I doubt it. He is not the house.
Possible. But then with Japan increasing their rates would be gradually closing the window on the carry trade arbitrage. The government is trying find a narrow path between competing forces. I still think in the near future that the government will attempt to close the legal but dubious offshore tax arrangements of large corporations. This way that will be collecting more taxes but not via general population.
No, it is not not possible with the majority of the 12 member of the FOMC clearly opposed to such utterly ignorant stupidity.
Aren’t we due for a massive cpi disinflatiinary shock?
The rise in interest rates is “not yet” reflecting a rise in expected inflation.
The 10-year Treasury-TIPS “breakeven inflation rate” (expected inflation) is still rangebound between 2.2 and 2.45% (per FRED, as of today). Been here since 2022. But a break above 2.5% would be very meaningful “to this observer”.
The real yield on TIPS is still in the 2.3-2.5% range where it’s been since July. A break above 2.5% on the real yield would also be very meaningful,in a very different way!
It’s also possible that both the expected inflation AND the real-yield could spike above 2.5%.
Bond Vigilantes are the last line of defense to absolute disconnect of reality by a flawed political design based on extraction and short term thinking…leadership matters not Hollywood actors performing a script…the script is out of control….
With this fed and this congress these yields are unreasonably low.
The trading desk back peddled this week. IBDDs, interbank demand deposits held at one of the 12 Federal Reserve Banks rose + 96,779b.
That’s a relatively big number for the H.4.1 release.
Why do you think stocks rose today?
Um, tell me more. Please. I’m genuinely curious. Are you saying that one of reasons bond yields are spiking is that banks in particular are throttling back their purchases at the auctions? And we can measure that change in appetite at almost $100 billion?
They’re looking at “Reserve balances with Federal Reserve Banks” and saw it went up $97 billion this week. Some use it as a market of liquidity for stock market. That’s probably the rhetorical ask of why stocks went up today.
Pre 2008, reserves were Manna from Heaven. Contrary to Nobel Laureate Dr. Milton Friedman, reserves were NEVER a tax- not even for required reserves.
Today, link: “Bank Reserves And Loans: The Fed Is Pushing On A String” by Charles Hugh Smith
But an increase in excess reserves lowers the liquidity premium. It increases settlement liquidity. It reduces funding spreads. So, contrary to the pundits, I say it increases funding liquidity (liability rollover capacity in the borrow short to lend longer savings / investment paradigm).
You drop the reserve levels to scarce levels, you get a Sept. 2019 repo spike. This last Thursday, we got the opposite scenario.
Sep 15 is tax day when estimated taxes are due, and the banks need to load up on reserves (cash they put on deposit at the Fed for instant liquidity) beforehand because when those tax payments go out, they will suck cash out of their reserve accounts at the Fed and push them into the government’s Treasury General Account at the NY Fed, and that cash is then gone from the banking system, and those tax payments will suck cash out of the repo market and into the TGA.
Those reserve balances should start declining again on the weekly balance sheet starting next week.
If you don’t think this is all engineered on purpose you just aren’t cynical enough. It’s so obvious. Power is one hell of a drug.
The only way to address the debt is to pay it off with inflated dollars. There’s zero doubt at this point between the Fed, Treasury and now casino Don that this is the plan.
There is no need at all to “pay off” the debt, or even to pay it down. It just needs to grow more slowly than the economy and tax receipts.
And the man from Nebraska said it all years ago when he spoke of firing Congress wholesale if they spent 3 percent more than they took in from taxes, etc in a year. Just pass one law which requires federal elections only if the nations books do not balance. This way everybody in Congress is replaced by new members if they overspend, and they can hang around provided
I agree. If we can stop the debt from growing – which is not going to be easy due to social program obligations, debt financing, market manipulation financing, and of course additional spending – then inflation would reduce the debt load over time as dollars lose spending power. But I don’t see any political will to even pretend to stop the debt growth. That means the debt will double in size due to the basic math – in just a few years.
The deficit is 6% of GDP, so GDP would have to grow 6% for the debt/GDP ratio to stay constant. That’s not going to happen in a country to graying demographics, low population growth, and a falling workforce participation rate.
GDP growth has ranged around 2% to 2.5% since 2023, but we have to keep in mind the stimulative effects of government borrowing on that GDP number. If taxes rose to reduce the deficit to 2.25% of GDP or so, or if government spending dropped to do the same, GDP would go down quickly.
I.e. if the deficit was brought down from 6% of GDP to 2% of GDP, that would represent a -4% reduction in GDP. To understand the scale of that, consider how Real GDP dropped -3.98% during the Global Financial Crisis (i.e. 2Q2008 versus 2Q2009).
So yea, we’re past the point of political possibility. It would be political suicide to put the US on a sustainable fiscal path, so we’ll be taking the path Ray Dalio predicted instead. Sell your US treasuries and buy UDN, Australian/New Zealand dollars, PMs, and emerging market debt denominated in local currencies.
“The deficit is 6% of GDP, so GDP would have to grow 6% for the debt/GDP ratio to stay constant.”
I stopped reading there. BS overload.
Nominal GDP in Q2 grew by 8% annualized and by 6.6% year-over-year. So there! It’s working.
The deficit and the debt are NOT adjusted to inflation, so you have to compare apples-to-apples, the deficit to “nominal” or “current dollar” GDP (not adjusted for inflation). ALL debt-to-GDP and deficit-to-GDP figures work on that apples-to-apples basis.
I explained this in every one of my many articles on this topic. You need to start reading them — you’ve commented here for a long time — because I’m getting tired of this stuff constantly in the comments.
The first step is to adress the deficit of 6% of GDP.
I just hope there are payment options other than just 5K cash like a troy ounce of gold or perhaps Bored Ape Trump NFT.
Or a $5,000 30-year TIPS that today pays 3.05% above the CPI inflation rate for the next 30 years. I’d check that box on a form. For the private satisfaction of using exponential math to apply a tiny but growing pain to a public that can’t snap itself out of serial stupidity.
I might trade my $5,000 for a more responsibly managed currency before everyone else does.
So Trump just promised a $5,000 “Trump Dividend” to every adult American if Republicans keep Congress in the midterms. Wondering if he’s actually going to try paying everyone out in crypto coins to keep the “Trump brand” enrichment trend going?
Wolf – wouldn’t you say the bond market and therefore the U.S. economy meeds to ‘pass go’ and be escorted directly to the ICU? Something doesn’t feel right.
Neither. But the way that Congress and this and prior administrations have handled the fiscal responsibilities of the US is not good. So the official solution is higher inflation (3-5% range), higher yields (cost of borrowing for everyone who borrows), and higher nominal economic growth. It works, but you have to get used to the higher inflation and higher yields/cost of borrowing.
The S&P 500 total return was 81.3% for the first Trump term (2017–2021) and gained over 36% from the November 2024 election through September 2026, currently in 2nd Trump term. I keep putting my money on the POTUS he is and will continue to be a winner as he continues the pull out all the STOPS, no sacred cows. If Trump puts $5000 on main street for the people, he might get a 3rd term.
The other outcome of that $5,000 stimulus check per adult could be: inflation spikes, long-term interest rates (including mortgage rates) soar as result, the housing market gives up its ghost (10% mortgages LOL), companies batten down their hatches because their cost of borrowing has soared at these interest rates, and stock market investors flee into fixed income to lock in the high yields for years to come, the AI investment bubble implodes, and stocks tank.
Free money is the most expensive money there is.
All you need to do is look at the prolonged pain from the last wave of free money which is still going strong 5 years later.
An alternative narrative is that we dodged a Great Depression scenario, returned to full employment within a matter of months, and enjoyed years of higher GDP growth (and asset price growth). In exchange, we had a brief outburst of inflation that was extinguished relatively quickly in economic terms, wage growth that generally kept up with inflation, and a large increase to the national debt. I think in hindsight we made the right tradeoff. Read about how people lived during the 1930s and think about how your life would look if you went a year or two without an income. Think about eating a third of a can of beans for each meal: breakfast, lunch, and dinner, putting cardboard in the soles of your worn-through shoes, or walking from town to town looking for work. We were on that path back when a third of all small businesses had only a few months of working capital remaining.
Of course, nobody is pissed off about the negatives that never happened. We’re sitting in homes that weren’t foreclosed, slacking off from jobs that aren’t under threat, with full bellies, the AC on, and a nice car in the driveway worrying about inflation and the debt. These are just the bills coming due for a bargain we bought in 2020-2022, and it was the best alternative available to policymakers at the time.
Enjoy your life and feel gratitude now, because policymakers today are setting the stage for the next crisis. We make it politically profitable for them to do so by worrying about the wrong things.
@Chris B,
Correction, You’re sitting there in your home that wasn’t foreclosed thinking about things that didn’t happen.
More than half the country is sitting there unable to afford a home and think the American dream was stolen from them. Lots of voters are rightfully pissed off with irresponsible monetary policy
“More than half the country is sitting there unable to afford a home”
LOL, 65% of households (that’s a lot more than half) own at least one home already. And of the 35% who rent, many of them are “renters of choice,” who rent because they want to, though the could afford to buy, and they pay $5,000 or $6,000 or $10,000 in rent no problem.
Yes, people are “rightfully pissed off with irresponsible monetary policy,” but not nearly enough people.
There is no such thing as a ‘third term’ for any US President.
Let’s pretend for a moment that DJT running for a 3rd term and the GOP and several states breaking the constitution and actually putting him on the ballot does not cause a civil war…
Let’s also pretend that presidential terms actually have a meaningful impact on the S&P 500 performance.
Then Trumps 2016 and Bidens 2020 terms held roughly the same result (63% against 62.6%), and both are Trumped (pun intended) by Obama’s average over 8 years of 88% per term. (data from macrotrends.net)
I hope it’s an advanced level of sarcasm that I didn’t quite catch.
Sign of weakness, of desperation, to offer that sort of ‘bribe’…….but provincial premier here in Ontario gave all voters $200 cheques before last election…got himself re/elected…….’course that’s cash in hand before election, not a whispy promise for sometime after…….still, $5000’s a big number…..very tempting……..wonder how much we’re going to hear of this…..if we hear enough it could become a promise that can’t be rescinded……..
2026 and US is giving money to just the adults?
Almost all the smart countries are giving money to Children or Mothers.
They are the ones that need it these days, not the boomers.
1. That’s already happening. You’re just not paying attention. The most recent addition was the “Trump accounts.”
2. In terms of your boomer BS: people who are 65+ years old account for only 18% of the population. The 18-64-year-olds account for 60.5% of the population. The under 18-years cohort accounts for 21.5% of the population.
Now do the percentage of assets held by those demographics.
Why sure, do you think newborns and teenagers and college students have had enough time to earn money, save, and invest??? It takes decades to accumulate assets. You people were completely spoiled by your boomer parents. You want to sit on your butt and swipe right and instantly have assets. That didn’t work for us, maybe it works for you, for us it took decades.
BTW, I’m surrounded by young immensely rich people. Lots of them. That’s where our “mansion shortage” comes from, people in their 20s and 30s with huge amounts of money.
Just a theory, but could Bessent and trump b coordinating this intentionally? I doubt they’re this stupid.
Pretend like u want interest rates down, but trick the long end rates up to fight inflation so the fed doesn’t have to on the low end as much. This lets inflation run hot sort of while keeping the gov’s debt contained by keeping bill rates low and shifting “some” of the debt to the shorter end by buying back bonds.
Obviously you can’t tell the bond market this.
Seems to fit Warsh’s thinking as well.
Just a thought
Yes.
The political objective is to avoid an economic crisis during your term in office. Thus, doing unsustainable things to postpone the next recession or bond market tantrum makes sense.
The US can only devalue its currency to escape its debt. That is the only way out, for the next 6 months, the next 6 years, or the next 6 decades. But as you note, policymakers cannot announce a policy to do so. While there are still enough gullible true believers in the 2% target, there is still a market for treasuries at too-low rates.
Bessent and KevWar may be doing their fiduciary duty to the government when they lie to us about being able to control interest rates or inflation, but it would probably be a mistake to grant them much credibility.
It is month 60 of failing to hit the 2% target and somehow the trusting rubes have not all gone extinct.
What I don’t understand is why Trump only made it a $5000 dividend. Why not make it a bigger, more spectacular number like $1,000,000? Heck, why not make it $1,000,000,000?
Imagine, Republicans hold the House and Senate and every adult in the U.S. instantly becomes a billionaire………..
Obviously, Trump’s promise is idiotic and would unleash massive inflation, but it is demonstrating that most Americans are partisan hacks. He’s getting too little criticism from Republicans who criticized Biden for doing this in early 2021, and tons of criticism from Democrats about Trump “bribing voters,” yet there was nary a peep from them when Biden was buying votes.
The fact that Biden did it too doesn’t make them wrong.
I don’t buy that argument. At some point in politics, silence becomes tacit approval.
Biden did not condition his stimulus on people voting a certain way. That’s a huge difference.
Yes, he did. Google “Biden says electing Georgia’s Ossoff and Warnock would lead to $2,000 stimulus checks,” and read the CNN article that comes up.
Please point to any articles where Biden promised voters money if they elected a Democratic Congress and Senate. You will pardon me if I do not hold my breath…..
Sure, Biden sent citizens money, just like Trump did his first term. It was connected to something big that the country was going through. Maybe you remember it.
It is hilarious watching people try and pretend what Trump did at his “convention” is the same thing Biden did. To do that requires ignoring a whole lot of context. I don’t think arguments that require a reader to willfully ignore context to be very credible. Willfully ignorance never is credible.
See above. And bullshit that “we were going through something big.” The worst of COVID was over by early 2021 when Biden bribed voters with $2,000 stimulus checks (and the massive stimulus bill that came along with it).
Tsonder, the stimulus went out for middle and working class in early 2021, after a year when GDP contracted by 3.5%. It was already rebounding by Q3, but the wounds were still open for a lot of folks.
I was not living in the US, but we got hit by 10 freaking per cent in Spain and I received a slightly larger amount of aid from thr government, which helped my one-person business stay afloat, after taling a 60% revenue hit that year as clients disappeared (and I just had to eat that, there was no impressive recovery).
$2k for an economy with more than double of Spain’s GDP per capita, even if the US economy suffered less, makes sense to me.
Could the aid have been better targeted to those in greater need? Sure. But there’s absolutely no comparison between those and current circumstances. And there is way more potential political benefit in giving out money a couple of months before the mid-terms than just after inauguration.
@TSonder,
It is not bullshit. If I’m mathematically generous to your argument, and count exactly the first two years from when COVID reached our shores, under the adage that “pandemics last about 2 years”, then only 35% of COVID deaths had occurred when Biden made that promise. It was as bad as it had ever been that winter, and would get worse still before it got better. If we count until WHO declared the end of the pandemic 14 months after the 2-year mark, the percentage drops further. And also, the vaccine was not available to most when the promise was made. And even after the vaccine was available, there was a cohort of people who were afraid of both the vaccine and the disease, it wasn’t always one or the other. There was another probably larger cohort who got the vaccine and were still afraid of the disease. They still heard true stories of people dropping dead from the delta variant in 2021, never mind that those were mostly unvaccinated. And they didn’t want to leave the house, and it was still affecting the economy.
In summary, you are engaging in revisionist history. It’s easy to do, because it was a uniquely terrible time, and a lot of people just want to forget it. Maybe you don’t even remember how far we still had to go on New Year’s Day in 2021. Or maybe you weren’t afraid and were never afraid, and assume that most felt like you did, but I don’t think they did.
I strenuously disagree with both of you. Geo, the 3.5% contraction was because people weren’t traveling or eating out. People were flush with cash, from PPP loans, to the previous stimulus, to the $600/week extra unemployment, and so forth. That’s why retail sales shot through the roof, as people spent the money they got and didn’t need on random stuff. If it was just replacing what was lost, that wouldn’t have been the case. We knew what was happening, and we knew things were getting better. Sure, the wounds were open for some people in certain fields, but the solution there was extending unemployment. Not throwing trillions more money out when the inflation fire was already starting. There’s absolutely a comparison to today. In both cases, it was vote-buying, not a reasoned response to anything happening.
Marvin Gardens, I don’t care how long “pandemics last,” as not all pandemics are created equal. By the time the March 2021 stimulus bill was passed, America was on the road to recovery. It was totally unnecessary, and I’m not Monday morning quarterbacking, I said so at the time.
Even if someone is afraid to leave the house, I’m not sure how throwing $2,000 at them so they can buy shit on Amazon is productive.
If the amount were even one cent it wouldn’t be in any believable, let alone doable in an economy with a snowballing $2+ trillion a year deficit.
For those of you who saw the movie, welcome to idiocracy! The problem is that the idiots have nukes.
Hedge accordingly.
How do you hedge a global decline in intelligence, which does actually seem to be happening? Brawndo stock?
It’s got what plants crave! I see Dr. Lexus is now doing Ozempic commercials btw.
The mechanism for true price discovery was destroyed long ago, so the bond “market”, like the Fed, is quickly become less relevant. The laws of physics and Nature are reasserting themselves. There is now almost 9 billion souls on this rock all competing for the very real resources and commodities that are required for a decent standard of living. That a lot of very real demand. All while the the supply chains are being destroyed. You don’t have to be a genius to see what the outcome will be. Seems humanity never really learns. Devolution for the vast majority.
Quite depressing that the reaction to buying an election has mostly been, “How will it affect the national debt,” rather than, “This man needs to be removed from office.”
We’re back to the late 1800s when copper baron William Clark payed Montana State legislators to elect him to the US Senate.
That scandal led to a Constitutional amendment so US Senators were elected by voters rather than state legislators.
It’s shocking how the American people have given up on the idea of democracy.
The US never was intended to be a democracy, but rather a democratic republic and the word democracy is constantly dramatically misused.
I’d say at present it could also be called a representative democracy. We’ll see how that goes moving forward. I agree that it was not intended to be that in the beginning.
No election has been purchased yet. Only an offer was extended. I guess we wait until November 3 to find out if the offer gets accepted. Maybe some fence-sitters are holding out to see if the offer gets sweetened.
I haven’t given up on democracy. It’s working. There’s just a variable lag between choices and consequences.
So how about the Democratic promise of free healthcare, free groceries, free,….. Is Trump’s 5k bribe any different? He has to compete to win. Remember, fight, fight….
Using just what for money?
Yes, they are different.
Free healthcare is a policy proposal that would need to get through Congress, meaning that it would be approved–or blocked–via democratic legislating processes.
The 5k bribe is a politician offering to unilaterally pay people based on how they vote.
Now, if a billionaire became president and offered to pay everyone’s healthcare bills if the billionaire’s party won control of Congress, then it would be the same.
You’re sort of right. Trump shouldn’t have offered Stimmy. Instead he should have promised free airfare to anywhere in the country and a government run housing construction company that would sell houses “30% under market value”.
Like free buses and city run grocery stores selling at a loss in a major East Coast city – but bigger.
Nothing is free. That’s what taxes are for. Bur taxes can at least be aimed at those who make a lot (or obscene amounts) of money, unlike inflation, which is much easier to dodge if you are rich and/or can negotiate salary increases and inflation adjustments.
If the Fed doesn’t raise short rates the bond vigilantes will raise long rates. After a 20 year hiatus the bond market is working again!
Hotter Core CPI Adds Pressure for Fed to Hike Rates…
Treasury yields surge toward danger zone…
IEA warns of widening oil supply gap…
Diesel hits all-time high…
Maybe someone can explain why the CPI from March through August increased by 1.077, or 0.77% for 6 months, while the headlines project more than 3% for 2026, or 1.5% per 6 months. Note there were no CPI numbers for Jan/Feb.
There was a huge negative reading in June from May (-5.0% annualized), the only negative reading in the 12-month and the 6-month CPI. The effect gets spread over 12 months in 12-month CPI and over 6 months in the 6-month CPI, so it has double the effect in the 6-month CPI. This is why 6-month readings are much more volatile than 12-month readings.
The more the Fed fiddles with the UST market, the worse they will make the situation.
So let me know if my thought process is wrong:
Hold in September -> Regardless of inflation we’re pissing off the whole world, Japan is raising rates and may need sell treasuries, govt spending is still out of control -> Bond market raises rates
Raise in September -> same conditions as a above -> does this appease the bond market?
Cut in September or near future-> bond market raises rates even more
Even with a recession, our govt spending goes up even more and the Japan carry trade starts to look less appealing. I see us cutting but bond yields not dropping.
I don’t see any path to lower rates.
I would not want to be a bank or “investor” holding a lot of 30 year bonds at this time. I wonder how many are already insolvent ?
People laughed a few years back when I wrote that interest rates could reach 20% rates again. They thought ZIRP and NIRP were here forever.
On the other hand, nobody that I know believes anything that comes out of the mouth of that washed up reality show “star”. So there is that.
I’m hard pressed to see a 10 year at 4.75% when safety is here:
4-Week 912797VL8 09/15/2026 10/13/2026 3.775% 3.839%
8-Week 912797VW4 09/15/2026 11/10/2026 3.845% 3.922%
17-Week 912797WP8 09/15/2026 01/12/2027 3.895% 4.001%
Babylon Bee: “Trump Pledges That If Voters Defeat Socialism In November, They Will Each Get An Equal Redistribution Of Wealth From The Government”
Seriously though… socialism is getting very popular and becoming the political consensus. The difference is that Republicans are more aggressive about having the government seize shares of companies and giving it a different name.
i enjoyed cashing all those covid payments. i think it was 3 ? plus the PPP loans so many of my clients and pals took. i’m not dumb enough to think Trump in 2026 is sending us one lousy shekel, but if a miracle happens i’ll cash the check. i used the other freebies for massages and nice dinners. if one sets up life properly there is no IRS demand to pay any taxes. so many ways to accomplish this. lots of free money, called credits too, in some businesses.