Today I wish to look at something which has been an issue since the end of 2021 and has become a particular issue in 2026. If we look at things in price terms there was rather a rout in the US long bond future which looked like it might fall 2 points at one stage. That was reminiscent of the earlier days of my career in bond markets when yields and interest-rates were much higher than now, Actually back then that was the price limit too before we started again with if I remember a limit of three points. These days the limit starts at three points. As it happens we did not quite make it yesterday with the furthest fall being 1.97 points.
But this was quite a reversal for US Treasury Secretary Scott Bessent and his “Don’t bet against the house” claim.
US Treasury will buy up to $6 bln of 20-30 year debt in September 24th liquidity buyback. (@financialjuice)
The problem is that such moves look like a peashooter when a bazooka is required and thus the new effort at a type of Yield Curve Control has morphed into the 30-year rising to yet another multi-year high of 5.43% as I type this. Or in price terms we got the 2 point move and some just not in the same trading day. This had another consequence because the cost of controlling the longer end of the bond market is that they have to issue more shorter-dated debt. How is that going?
The yield on five-year US Treasuries rose above 5% for the first time in almost two decades. (Bloomberg)
Let me remind you all that I have argued all along that the switch to shorter-dated debt is a really stupid idea that makes bond markets more vulnerable to shocks. America is not alone in this as for example Japan and the UK are at it too. Actually yesterday was an example of why it is a bad idea. But of course when it goes wrong we will be told it could not have been predicted and therefore is nobody;s fault.
The Trigger
This brings us to an issue that I pointed out on the 4th of August.
Should this turn out to be true then the US economy is growing at quite a rate. For example the quarterly growth of around 1.5% is likely to be more than the UK will grow this year. Plus it would mean it is presently growing faster than China. The investment number particularly catches the eye if we compare it to many of the struggles we see in Europe.
That was based on an Atlanta Fed GDP Now reading of 6.2% annualised. It has ebbed and flowed since but remained strong. Then yesterday we were told this.
The headline flash S&P Global US PMI Composite Output Index rose from 56.0 in August to 58.4 in September, registering the fastest expansion since July 2021 and an acceleration of growth for a fourth successive month.
This means that the PMI business survey is now pretty much inline with the Atlanta Fed.
US business continues to boom, with output growing
at the fastest rate for over five years in September.
Historical comparisons suggest that the latest survey
data point to annualized growth of around 5% with a 4%
gain now signalled for the third quarter as a whole.
Indeed they go futher.
“To put the growth surge in context, barring the spike in
demand following the opening up of the economy after
the COVID-19 lockdowns, the latest improvement in
business activity is the greatest recorded since early 2015.
Business is clearly booming now in both manufacturing
and services.”
What the Black-Eyed Peas would call “Boom,Boom Pow!” means that after criticising Treasury Secretary Bessent earlier he has had a point in this arena about string US growth except there is a consequence of this which I have regularly pointed out but he skips.
Overheating
For younger readers this is pretty much a text book description of what used to be called overheating in an economy. From the PMI business survey.
“However, this growth is being accompanied by some
of the most severe supply chain bottlenecks seen in
the near-two-decade survey history if the pandemic
is excluded, with companies also reporting increasing
problems finding suitable staff. Backlogs of work are
consequently rising sharply.”
Perhaps the PMI people have not experienced this sort of thing as they then get a bit mealy mouthed.
While this accumulation of uncompleted orders bodes well for the further expansion of output and capacity in the coming months, it also indicates that companies are developing more pricing power, and hence is a worry for the inflation outlook.
Personally I think that it is a bit more than a worry and they get there in the end.
“Firms’ input costs have meanwhile jumped in September
at the steepest rate for four years, with fuel and transport
costs spiking higher thanks to the rise in oil prices seen
during the month, which will add further to the upward
pressure on selling prices and inflation in the coming
months.”
This means that inflation will also be on the march. Now if we take the headline measure preferred by the US Federal Reserve it is presently 3.7%. If you add that to the rate of economic growth you get somewhere between 8% and 9% for nominal growth. On that road it is no surprise at all that bond yields rose. In fact if you believe the growth push then you could easily argue that they need to go higher still.
Care is needed as the 30 year ironically falls out of play as so much could happen in the next thirty years. But we do see why the 5 year went to 5% and frankly even basic maths of 4% growth and 3% inflation explains why yields rose. Now the growth spurt will not last forever but sadly inflation looks to be rather permanent these days thus we see that it may turn out to be quite an error issuing bonds with shorter dates. Or if you prefer how we ended up with this yesterday.
US 5-Year Note Auction
High Yield 5.033% (Tailed by 3.1 basis points)
Bid-to-cover 2.21
Sells $70 bln (@financialuice)
Comment
There is an element of ying and yang in this as it is good for many bond market metrics to have strong economic growth. Tax revenues should be strong also in real terms and with inflation on the scene nominal ones could surge. That is part of the road to my theme that annual economic growth of 3% can fix most fiscal ills. The problem is that these days pretty much every government sings along with Shirley Bassey.
The minute you walked in the joint
I could see you were a man of distinction
A real big spender.
Then there is the problem for countries which cannot even dream of this level of economic growth like my own, Europe and Japan. For them higher bond yields can be even more toxic as the fiscal numbers slip away and as I have pointed it out before come with a sense of contagion as higher bond yields create worse fiscal metrics which create higher bond yields.
As a final point there will be another factor in this for the US, which is how long can the AI boom last?
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