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@theMarket: Bonds Indicate Growing Dissatisfaction With Monetary & Fiscal Policy
While the stock market has declined only a few percentage points from its all-time highs, bond markets worldwide are reacting differently to higher oil prices, inflation, and government debt.
Japan's 10-year sovereign bond yield is almost at 3 percent, and the 30-year is above 4 percent. Australia's 3-year surged as much as 20 bps to 5.05 percent — it's highest since 2011 — and New Zealand's 2-year jumped 25 bps. Europe's yields are no different, but it is here in the U.S. that most concerns investors.
One could characterize the back up in bond yields and fall in bond prices across the globe as a buyers' strike from fixed income investors. Clearly, higher oil prices are part of the equation. Both WTI and Brent crude prices topped $100 a barrel this week.
Inflation, as I predicted, is moving higher, as reflected in the Producer Price Index (PPI), with the main culprit being August's increase in energy costs. Year over year, the PPI advanced 5.4 percent. The Consumer Price Index was not much better. It was a hotter number than most expected. As I have cautioned readers, that rebound in inflation will continue through at least September, if not longer. I can easily see inflation at 3.75 percent by the end of the fourth quarter.
We all know why oil is where it is, so I won't waste space recounting those facts. On top of that, the Trump administration's new and existing tariffs have driven up the price of everything — especially groceries. Diesel fuel, a major cost in transporting goods, is now above $6. This week, it didn't help that the president is promising $5,000 to every American if they deliver a GOP majority in both houses of Congress. That will add more than $1 trillion to our debt load.
This is at least the fourth time Trump has promised cash to Americans, and while the party faithful may believe him for a fifth time, few else will take him seriously. However, even suggesting it in the face of $40 trillion in national debt caused yet another spike in bond yields. The benchmark U.S. 10-year Treasury was above 4.93 percent while the 30-year hit 5.34 percent. Bond investors are clearly demanding higher real returns on their bond purchases, and they are getting them. Both the 10-year and 30-year auctions this week proved that. Given inflation forecasts, I expect more of the same.
So far, the U.S. Treasury Secretary Scott Bessent's attempt to rein in long-term bond yields has failed. At the same time, betting markets are wagering an 80 percent probability that the FOMC will raise rates after its Sept. 15-16 meeting. There is also a 90 percent chance that if not September, December will see a hike. That may happen, but I don't see how that will help the situation and may cause more problems in the months ahead.
Since the rise in inflation has been caused by the Iranian war, increased government spending, and higher tariffs, raising the short-term Fed funds interest rate will not address any of these issues. I suggest readers read my recent columns on bonds for further explanations.
At most, a Fed hike might reduce credit on the margin, which would impact AI, the very lifeblood of the equity market advance year to date. The AI revolution requires capital, and a hawkish move by the Fed will only curtail that borrowing (or at least make it more expensive).
Thus far, September is shaping up to be a difficult month for stock investors and certainly for those who hold bonds as I cautioned. This week the S&P 500 Index fell four days in a row only to bounce on Friday.
Life will get even more difficult if the Fed raises rates next week, but it is between a rock and a hard place. If they do nothing, bond vigilantes will likely keep dumping bonds because the Fed is sitting on its hands while inflation runs rampant.
If they do decide to hike rates, the stock market will most certainly take a real hit, as expectations for continued rises in equity earnings will need to be throttled back. The return of 7-plus percent mortgage rates will also not sit well with Main Street, nor will the fact that wages over the last six months have not kept pace with inflation.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.
The Retired Investor: U.S bond prices fall as oil prices and inflation expectations rise
This month, the U.S. Treasury plans to triple its U.S. bond purchases from $2 billion to $6 billion from Sept. 4 through Nov. 4. Given that the market value of the Treasury market is about $30 trillion, that is a drop in the bucket if the intent is to cap yields on the long end of the yield curve.
Could the Treasury do more? Yes, according to some estimates, they could spend almost $1 trillion if they wanted to use up their checking account (called the general account). That is a lot of firepower, especially on the margin when one is seeking to control the ascent of bond yields. Debt analysts argue that the actual yield of a bond matters less than how quickly the yield accelerates.
As of this writing, the U.S. Ten-year benchmark bond is yielding 4.91 percent, while the thirty-year is yielding 5.34 percent. The present back-up in yields is not only a U.S. problem. Mounting debt and aging populations hit by a trio of global shocks- higher oil prices, inflation, and government spending are coming home to roost.
U.S. Treasury Secretary Scott Bessent would deny that. He believes U.S. interest rates are going higher because investors believe economic growth is reaccelerating. That could be true, but it could also be a wishful spin given that we are just a few weeks away from midterm elections. In any case, don’t be surprised if the Treasury ups the amount of purchases they make again in the days ahead.
At the same time, Kevin Warsh said in his Jackson Hole speech that the Fed needs to do more work to get inflation down to its 2 percent target. The current Wall Street narrative is that Bessent is trying to cap long-term bond rates while Warsh is preparing to do the opposite — hike rates. On the surface, it appears that the two men are working at cross purposes. But could there be another explanation?
Consider this: what happened when Jerome Powell cut interest rates in September 2024 and then again in 2025? Long-term Treasury yields went up, not down, breaking a historical, four-decade cycle. Long bonds have almost always tracked the Fed's path lower. Why the change? Because the bond vigilantes began pricing in stronger-than-expected economic growth and persistent inflation.
I suspect that if Warsh had delivered a dovish message, those same vigilantes would have jacked yields higher than they already are! No, both men are working together, in other ways, for a good reason. Back in June, in a column on sovereign debt, I wrote this:
"Former Treasury Secretary Henry Paulson, who navigated us through the Great Financial Crisis of 2008, warned of a potential "doom loop" in the bond market. He worries that demand for U.S. government debt could collapse soon.
I warned readers that this could trigger a cycle of lower bond prices, higher yields, and rising inflation. The fact is that our government's Treasury market underpins everything from mortgage rates to corporate borrowing to equity prices. The former head of the Treasury urged policymakers "to prepare an emergency plan and have it ready if and when demand for U.S. government debt falters."
A crisis, as Paulson suggested, would leave the Federal Reserve as the lone buyer of our treasuries. Realistically, that would mean the government would be forced to "print" money in one form or another. That would trigger a fresh round of inflation, eroding valuations across most asset classes, including equity. This could cause a large (30 percent+) decline in the stock market."
That was a strong warning, and I believe both the Treasury and the Fed have taken him seriously. We are witnessing the beginning of such a plan. It is to be rolled out in stages. The Fed's credibility had to come first. The appointment of Warsh as the new chairman of the Federal Reserve Bank has triggered worries that the Fed's independence is in jeopardy.
The president, an easy money advocate, had attempted to "pack" the 12-member Fed committee with his people. He also made clear that Jerome Powell's replacement would need to tow his line. As a result, Kevin Warsh came into the job tainted with a heavy dose of suspicion from skeptics both here and abroad.
Warsh's hawkish statements thus far have largely dispelled many of those fears. His willingness to let the markets dictate where long bond rates should go, while providing less communication to the financial markets, may also be part of this plan. His study committees, which analyze and adjust government data used to determine monetary policy decisions, are also part of the plan.
We will know more about how the Fed views the economy and inflation next week. The betting markets indicate that there is now a 70 percent chance than the Fed raises interest rates at their FOMC meeting on September 15-16.
Next week, I will address how the two organizations might work together, especially in a period where the possibility of Hank Paulson's 'doom loop' appears closer than ever.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.
@theMarket: Higher Bond Yields Keep Markets in Check
The continued concerns over oil prices, inflation, debt/deficit, and renewed hostilities in the Middle East kept a lid on equities in these last days of summer. Despite all the fear and loathing over higher long-term bond yields in the last week or two, the markets are only down a few percentage points from all-time highs.
As readers are aware, I have been cautious in August and September, although I would see any consolidation as a buying opportunity. That said, there are more than enough concerns plaguing the market at the moment to make anyone cautious.
Oil almost $90 a barrel again, a re-engaged, shooting war of sorts in the Middle East; bond yields at highs not seen in years; and, of course, the midterm elections, which are now only 60 days away. It is the last event that keeps me looking over my shoulder the most.
It bears repeating that during the last three midterm elections in 2014, 2018, and 2022, the S&P 500 fell more than 10 percent during either August or September. All three times the sell-off occurred during the third week of the month. That doesn't mean it will, but it might.
In the meantime, the U.S. Treasury will begin buying back bonds beginning today, Sept. 4. And like clockwork, the bond vigilantes pushed up yields on long-dated Treasury bonds until the middle of the week before taking profits yesterday. Stocks, precious metals and the dollar all fell as a result.
While the financial media wailed and gnashed their teeth at this predicament, bond traders (of which there are few dummies) prepared to take profits and cover their shorts. Why take the risk that Treasury Secretary Bessent orders his guys to step in and start buying bonds beginning Friday or over the weekend? For those who missed it, take a gander at my latest columns on the bond market for more background on the present situation in that world.
That brings us to Friday, and the results of the latest non-farm payrolls report for August. With earnings results mostly over, and most trading desks with a "do not disturb" poster on their computer screens this week, the number took on added importance. Even though everyone knows by now the number will be inaccurate and subject to large revisions.
The job gains for August were 162,000, much better than the 50,000 forecasted. Wow! What a surprise, good employment numbers just two months before elections! Markets took the number in stride even though it builds the case for an interest rate hike by the Fed. I am still doubtful that will happen, although the Fed probably sees what I see — higher inflation data in the future.
The announcement that the U.S. will purchase one-fifth of Venezuela's crude oil reserves through a private company run by a buddy of the country's dictator (with a checkered past) was no surprise to me. I guess it is better than just stealing 20 percent of their oil reserves.
Back in November of last year, in "The Return of Gunboat Diplomacy," I argued that President Trump had his eye on obtaining Venezuela's vast oil reserves as opposed to wanting regime change and the end of the non-existent smuggling of Fentanyl into the U.S.
I am ignoring all the social media posts about how this will bring down gas prices and refill the Strategic Petroleum Reserve (SPR) lickety-split. It won't. If you read my November column, you will understand that it will take years and many billions of dollars to repair Venezuela's energy infrastructure and further develop that country's oil reserves.
In addition, the crude coming out of Venezuela is heavy oil. Our SPR was built for light and medium crude. That's going to be a problem. Is the deal worth doing? Yes, and we will do it — provided both countries agree to cooperate over the coming decade.
We have had a difficult past with that country's leaders and their oil wealth for a long time. U.S. oil companies have pumped massive amounts of wealth and expertise into the Orinoco Basin only to see a series of expropriations, takeovers by the state, graft, bribes, and you name it. It's a risk, but that was the strategic objective of our gunboat diplomacy last year and could over time double our own oil reserves.
The three-day Labor Day weekend marks the end of Wall Street's summer. It would not surprise me to see a little government action in the days ahead to bolster bond prices, with yields hovering at the top of their range. On the energy front, the summer driving season is coming to an end. That may relieve some of the price pressure on gas prices.
As for the markets, they will still be there on Tuesday, so focus instead on relaxing, fun, and the family. Happy Labor Day.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.
The Retired Investor: High Noon for the Bond Vigilantes
It was to be expected. Financial markets almost always confront a new Fed chair. That may still be true, but Kevin Warsh isn't the one in the firing line. It is the U.S. Treasury Secretary Scot Bessent.
The bond vigilantes have had their way in the bond market recently. When Kevin Warsh took over the Fed in May, he made it clear the Fed would take a back seat and let the markets set the proper level of interest rates, at least on the long end. OK, said the bond vigilantes, let's see what you got.
Since then, fixed income traders, or bond vigilantes as Wall Street calls them, have trashed the 10-, 20-, and 30-year U.S. Treasury bonds. They have sold or shorted bonds, sending yields on the thirty-year higher than at any time since 2007 (just before the Financial Crisis). The U.S. ten-year benchmark bond yield hit 4.50 percent as well, with strategists predicting it's on its way to 5 percent. Around the world, the same thing was happening in other countries' fixed income markets. Why?
The continued rise in oil prices, record deficit and debt levels, rising interest costs, and demand for borrowing were too much weight on one side of the scales. Up until this week, equity markets tried to ignore the moves; despite strong corporate earnings fueled by the enormous boom in AI infrastructure investment, they faltered.
Truth be told, some of that AI investment has also been an issue. Worldwide, companies that need trillions of dollars more in the AI race have been tapping bond markets globally for funds. That has set up further competition between private and public needs in the borrowing arena worldwide.
This was not what the administration wanted to see, at least here in the U.S. The stock and bond markets have become the lynchpin of success for a president already battling a multitude of negatives with midterms less than three months away. Something had to be done and fast as yields ticked higher and markets crumbled on Wednesday a week ago.
In this financial gunfight steps the government's financial sheriff, a hedge fund manager by trade, and one of the real gunslingers in town. Scott Bessent, Secretary of the U.S. Treasury, announced his department planned to double government debt buybacks, beginning in September, to the tune of $4 billion. Bond yields immediately tumbled, and the stock market surged.
The Treasury's purchases, he said, will target the long end of the yield curve where the bad guys had shorted massive amounts of long-dated Treasuries. To pay for this added expenditure, investors surmised that the Treasury will probably need to sell even more bills and bonds on the short end at their weekly auctions. And herein lies the rub.
Unlike the Federal Reserve Bank, the Treasury cannot print money. They indeed have a lot more money than any single bond vigilante, but it's not inexhaustible. The Vigilantes, after a day or two of indecision, were back to their old tricks and yields began to rise again. To gun down the guys in the black hats, Bessent would need more than a couple billion.
So, a few days later Treasury people floated the story that they could use the Treasury's almost $1 trillion General Account (the government's checking account) to finance the purchases. Nobody said they would, but the threat was enough to at least push yields down slightly on government bonds this week.
Wall Street immediately mounted up the free-market posse. From their high horse, various well-known managers decried this interference in the free-market system where price discovery is the bible in determining the worth of any asset. "Let the bond market speak," said one famed investor. Interesting how that works. It's OK for the government to buy shares in various companies, bail out industries, determine how much companies can sell and to whom, but don't mess with something so sacrosanct as the nation's Treasury markets.
Will Bessent's plan work? In the short term, he had stemmed the rapid rise in yields that had thrown the stock market into a dizzy. Both the 10-year and 30-year bond yields had moved down by about 10 basis points. However, Friday's speech at the Jackson Hole Economic Forum threw a wrench into Bessent's play.
The Fed chief made it clear that the Fed had more work to do on the inflation front. Markets took that to mean an interest rate hike could be imminent. Bond yields went right back up and are now trading at yields higher than before Bessent's announcement. It appears the Fed and the U.S. Treasury are working at cross purposes.
Critics say that without fixing the underlying causes of the backup in interest rates — government spending, inflation, debt, etc. — his efforts are no more than a pimple on an elephant's derriere. They may be right but don't be surprised that in the days ahead, Bessent decides to increase the amount of bond purchases the Treasury makes.
Next week, I will discuss where the Fed stands and why this could simply be part of a developing and ongoing plan first mentioned to readers in my columns on sovereign wealth funds back in June.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.
@theMarket: Nvidia Earnings Beat Pushes Markets Higher
It was a lovefest, as strong quarterly results from Nvidia, the linchpin of all things AI, once again wowed investors. Not even Kevin Warsh's hawkish speech at Jackson Hole could make much of a dent in investors' enthusiasm.
But looks can be deceiving. Yes, all three indexes gained on the back of the semiconductor company's earnings, but 10 out of 11 equity sectors fell on Thursday. How can that be, you might ask? Simple, technology stocks are now the largest weighting in just about every index. As such, the results rippled through so many tech stocks that everything else was dragged up with it.
That said, investors' love/hate relationship with certain aspects of the world's rollout of the artificial intelligence ecosystem took a turn for the better this week. Why so much attention on Nvidia? Because the semiconductor giant is at the center and the hub of the world's build-out of the infrastructure of AI. It beat second-quarter earnings and revenue expectations handily. And, even more importantly, Jensen Huang, the chairman, also provided a better-than-expected outlook for the third quarter.
Unlike previous quarters, when the company's stock price fell despite strong results, NVIDIA jumped almost 10 percent this time. Its report also helped other AI chip stocks and the technology sector in general recover after several weeks of lackluster performance. The company still derives the lion's share of its revenues from hyperscalers like Google, Microsoft, and Amazon.
Investors have worried that these companies were already spending too much to build out their own infrastructure, as the trillions of dollars they are spending on and off their balance sheets have raised concerns. The revenues from this area more than doubled in Nvidia's second quarter.
Investors are also concerned that these hyperscalers are beginning to build their own chips to reduce their dependence on Nvidia's chips. But none of that seemed to matter this week as investors eyed the $20 billion stock buyback and the $6 billion in dividends ($ 0.25/share) the company returned to existing shareholders.
In the meantime, Oman and Iran are working on a deal to jointly "administer" the Strait of Hormuz. Tolls figure prominently in that discussion. On the U.S. side, the latest economic pressure is to convince those who are trading with Iran to stand down. If companies and countries ignore the American directive, they would then be excluded from the dollar-based global financial system.
Exactly when and how this could be accomplished is up for discussion. Given that China imports more than 90 percent of Iranian crude in non-U.S. dollar trade, their cooperation would be of paramount importance. So far, their response has not been encouraging. Oil traders are unimpressed and have held crude prices in the $80- to $83-barrel range all week.
As for last week's attempts to cap the climb in U.S. Treasury bond yields, Secretary Scott Bessent appears to have succeeded, at least over the last few days. Yields on the Ten-year bond have dropped about 10 basis points. Those waiting to see whether the Fed would jump in and back the Treasury secretary's play were disappointed.
Fed Chairman Kevin Warsch underscored his commitment to reducing inflation instead. His speech in Jackson Hole was taken seriously enough to put an interest-rate hike back on the table by the betting markets. On Friday mid-morning, the probability of a rate hike was back up to 50 percent for the September FOMC meeting. So, the Treasury and the Fed are somewhat at odds on where they think interest rates should be, at least on the long end.
The three major indexes notched a positive week. An almost 2 percent move in the Nasdaq, a 1.2 percent gain in the S&P 500 Index, with the Dow trailing with less than 1 percent, indicates buyers are still willing to chase markets.
Gold fell toward $4,500 an ounce, its lowest level in a week, as investors digested what was perceived as hawkish commentary from Warsh. Given its rise over the last few weeks, the Fed comments provided an excuse for some profit-taking in bullion and in most precious metals and mining stocks.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.
