For the first time in about 2 years the bond market agrees with the Federal Reserve. It took the first half of the year for the Treasury market to fall in line with a Federal Reserve signaling higher for longer interest rates.
The market discounted six or seven rate cuts in January and are now pretty much aligned with a central bank willing to stay on hold as long as needed. Still the markets are pricing in at least one quarter point reduction by year end and see a high probability of two.
Now the market is weighing the timing of a second half pivot, a drama that is perhaps exacerbated by a hotly contested presidential race.
Neither candidate appears willing to address much less arrest high deficit spending so under either Administration spiraling US debt may cause the market to demand a higher premium to own longer dated Treasuries.
It is impossible to know when the market will decide that such risk are too much to bear, as the bond vigilantes famously did in 1990s. When it happens, it tends to be sudden and brutal.
This the concern that should be paramount as is the basis for James Carville infamous quote of “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”
Will the deficit be a topic of tonight’s debate?
The world has already been stunned by the outcome of various elections in India, Canada, Mexico, and France, elections that have impacted their bond markets.
Speaking of the potential pivot, a major catalyst/explanation for the unending advance in the mega sized technology shares since October was the belief that lower interest rates is immediately at hand.
It is widely accepted 2024 market performance is the result of the huge gains in this small group of companies, where market breadth is virtually nonexistent. Bloomberg writes “bifurcation between S & P 500 performance and breadth has reach the worst levels in three decades.”
The question cannot yet be answered whether or not last week’s volatility in tech is the start of something deeper or if that reckoning is still forthcoming.
Perhaps the more encompassing question is whether the unending advance in the mega caps could unravel, the result of yet another change in monetary policy assumptions.
Commenting on yesterday’s market activity, equities were relatively quiet. Treasuries sold off across the curve as the yen is continuing to fall as Japan might be forced to liquidate some of its massive Treasury holdings to support its currency.
Last night the foreign markets were down. London was down 0.28%, Paris down 0.48% and Frankfurt up 0.14%. China was down 0.90%, Japan down 0.82% and Hang Seng down 2.06%.
Futures are down about 0.25% as MU disappointed and nervousness over monetary policy and weakness in the Yen which is at its lowest level to the dollar since 1986. The 10-year is up 1/32 to yield 4.33%.
