I belatedly welcome all to 2025. 2024 was a year few had predicted. Depending upon the source and how it is calculated, anywhere between 50% and 60% of the gain in the market was the result of the surge in the Magnificent Seven. The amount of money concentrated in these seven companies and one sector is historical.
Commenting about the bond market, 2024 was forecasted to be “The Year of the Bond.” Bloomberg writes the total return [includes interest paid] for the benchmark 10-year Treasury was just 0.6%. Yields on the 10-year Treasury rose about 50 bps in December.
The world has dramatically changed. It is not conspiratory nor sensational to write that yesterday’s macroeconomic and geopolitical environment is no longer. The Financial Times stated about 60% of the industrialized world voted in 2024 and voters have spoken…the end of faux neo liberalism, transcending into progressive economic nationalism.
Simplistically speaking, the West has weaponized the flow of funds and the East the flow of goods. There is a repatriation of productive capacity back to more friendly shores where price is no longer the only determinant of a purchasing decision…reliability is now the now paramount variable.
Wokeness/Diversity, Equity and Inclusivity are no longer vogue. ESG has vastly underperformed and is being abandoned.
Vanguard, State Street and BlackRock control over 30% of S & P 500 companies. Several years ago, BlackRock’s Chairman Larry Fink led the charge into wokeness/ESG. Today, Blackrock, et.al, has abandoned these non-financial benchmarks and have returned back to historical financial benchmarks to measure the potential value of a company.
How will this unfold?
Trading is now dominated by headline-based technology algorithms where momentum is the predominant variable. Will this momentum turn in the other direction, momentum that is perhaps enhanced given the massive concentration of funds in a handful of companies and one sector?
Interest rates are the greatest variable of all valuation formulas. The selloff in the long end of the Treasury market (defined as maturities as 10-year or more has created the steepest yield curve since 2022. Shorter term yields are locked in a tight 9–12-month trading range.
Today and tomorrow are the auctions for the 10 and 30-year Treasury. December’s 10-year auction was “awful.” Are yields now attractive?
Consensus states the increase in yields is the result of proposed Trump policies. Little has been written about the make up of the federal debt where approximately 23% to 24% of the country’s debt is concentrated in short term Treasuries, defined as one year or less. The recommended range is 17% to 18%.
Washington must address its spending. Most will agree current fiscal policy is unsustainable where $2 trillion annual budget deficits for the foreseeable future are potentially economic suicide.
It is not a revenue issue but rather a spending issue. It is close to impossible for tax increases to make a substantial dent in annual budget deficits much less than the overall federal debt.
Inflationary growth and significantly lower federal expenditures are the only accepted path to tame the country’s burgeoning deficits.
The Biden Administration has created inflationary growth (aka Boomflation) but it also has spent prolifically.
A strong case can be made that the longer end of the bond market is now beginning to accept that the twin deficits are now starting to become a major factor and must be addressed as yields are at 14 month highs.
Hopefully Washington will address the issue before a major crisis unfolds, however addressing it may be akin to political suicide.
Commenting on yesterday’s market action, yields on long-dated Treasuries traded to a 14-month high. Equites was more of the same…big technology and the Magnificent Seven advanced while the rest of the market anguished.
Last night the foreign markets were up, London was down 0.33%, Paris up 0.71% and Frankfurt up 0.38%. China was up 0.71%, Japan up 1.97% and Hang Seng. Down 1.22%.
Futures are little changed ahead of a “deluge of bond sales” both on the corporate and sovereign level and Friday’s jobs data. The 10-year is off 2/32 to yield 4.64%.
