US 10-year yields fell as low as 2.88%
at the weekly open but have since run to 3.98%. I don’t think that’s a
view on the economy but a troubling sign of forced liquidation or a race
to raise capital. It’s early to be worrying about a blowup in basis
trades or some other kind of trouble but we saw that at the peak of
covid and it forced the Fed to pledge unlimited QE. The problems haven’t
gone away as no one really attacked any of those issues and they’re
arguably worse in a more-leveraged world.
Yields since then have continued higher to 2.33%, which is the highest since March 31.
Aside from forced liquidations, there is talk about rebalancing as a driver for the rise in yields. That’s likely to be part of the story but I have a hard time getting 30 basis points from that. There could be some broader selling and buying of equities on repositioning though, in light of cheaper equities but that’s a big leap to make in the middle of a trade war. Bank of America did say that client US equity inflows were the fourth largest in our data history last week.
Another angle is a potential re-think on inflation and the Fed. I’ve been warning for awhile that the Fed wasn’t on track to cut rates, particularly the 125 bps that was priced in at the extremes yesterday. That’s retreated to 104 bps but I still think it’s dangerous to rely on the Fed and that the inflation worries are real.
Picture yourself as a US importer right now? Many are making order from China for October at the moment and have no idea what tariff rates are. That could wreck supply chains and the US is also flirting with some shipping rules that make it even harder to import Chinese goods
