Bond Bomb Goes Off

It just got ugly in the bond market. Ugly for stocks, anyway. Ugly for those owning bonds to trade. Good for those wanting to buy safe Treasury interest to hold to maturity.

Janet Yellen figured out that Covid stimulus may have contributed “a little bit” to inflation. What a chipmunk! With dim-bulb illumination like that, it’s no wonder she finds it “hard to see how the math [of DOGE] works.” Is it hard to see how government efficiency helps reduce the budget deficit, Dear Yanet?

Yanet thinks that it was almost exclusively shortages of goods due to the supply-line crisis that caused inflation after the Covid lockdowns. Apparently, as Treasurer, she doesn’t know the most elementary formula for inflation: too much money chasing too few goods. She gets the last part because none of that can be blamed on her as Treasurer. She conveniently forgets—or was just never well educated in the fundamentals of economics—that it is when you have an over-supply of money confronting an undersupply of goods and services that inflation really catches fire because people will deploy the surplus money to chase after the goods they need or want.

Ah, well, Yanet, back to school for you.

As for her comment about DOGE, sure it is going to take more than efficiency majors to balance the budget—a lot more—yet every billion dollars helps. Save enough of them, and pretty soon you’re talking real money. Regardless, balance it we now must with some major changes because the debt is starting to consume everything like a black hole.

As for whether or not Trump and the DOGE Brothers, Elon and Viv, are going to accomplish that, I agree with Bill Bonner today:

Many readers think we are too ‘negative’ or that we may be afflicted with Trump Derangement Syndrome, blinded to the good the man might do.

Maybe. Our bartender tells us the Trump Derangement Syndrome is probably in remission. And, we’ll put in a special Suicide Prevention Hotline here in the office, just in case.

But there is nothing in Mr. Trump’s policy proposals... or his stray comments... to make us think he will do anything very different from the last time he was president. Or that tariffs will work now, when they’ve failed so many times in the past. Or that tax cuts will do anything except increase the deficit.

It’s a good article. I recommend reading it.

Why we have to conquer the deficit NOW

Yanet Jellin’ does make one accurate comment:

“Interest rate increases have led to higher costs of servicing the outstanding debt. That’s one factor that’s been involved,” she said.

But she made it in an effort to evade the responsibility of fiscal policy under Biden. Bidenomics was an accelerant to the inflation caused by Treasury’s work as an accomplice of the Fed to create a lot more money to fund Bidenomics as well as to fund all the stimulus and corporate bailout money that kept surplus money flowing into the hands of ordinary people (and megacorps) who, by government mandate, were no longer making anything or providing services, creating that shortage of goods and services.

From there, it was the high inflation that caused the interest rate increases that have as Gramma Jellin’ jives, “led to higher costs of servicing the debt.” And that is the little bomb we just saw go off today in the bond market when news hit the press that all of the members of the Fed at their last FOMC meeting were concerned that INFLATION IS BACK! (Now, who coulda seen that coming?) That caused the interest on the national debt to spike hard today.

“Almost all participants judged that upside risks to the inflation outlook had increased,” the minutes said. “As reasons for this judgment, participants cited recent stronger-than-expected readings on inflation and the likely effects of potential changes in trade and immigration policy.”

In other words, the return of inflation was already in the making since it started to rise last year at the first hint that the Fed would back down on its interest hikes. The members of the Fed want, of course, to shift the blame to Trump’s tariffs, and I’ve no doubt those will make inflation worse, maybe even much worse; but inflation was already getting worse as seen in those recent readings they acknowledged, and it is set to ramp up more still with no additional tariffs in place so far. Tariffs might become gasoline on that fire, but the Fed has failed and will be forced back to the fight either way. Those “stronger-than-expected” reading aren’t going away.

Zero Hedge says the Fed’s should have found some of this concern much earlier. They’re a little late to wake up to potential presidential impact:

Forgive us our ignorance here - admittedly we are not PhDs - but we do not remember the staff and members 'citing' inflation fears when the Biden admin dropped multi-trillion dollar spending bills (and called them Inflation Reducers)?

As a result of this news and more evidence this week that inflation is rising, yields blew up in the Treasury market, especially for the 20YR. The Treasury market hit its first 5% yield in this cycle of Fed policy shifts:

The 20-year Treasury bond offered a grim warning as a selloff fueled by inflationary angst gripped global debt markets: 5% yields are already here…. The move … indicates what’s potentially next in the $28 trillion Treasury market….

The 30-year yield topped 4.96%, while the 10-year rose as much as four basis points to nearly 4.73% — just shy of its highest level since November 2023. The moves echoed the run-up in yields seen in the UK and across emerging markets….

All that has forced bond investors to contend with the possibility that the benchmark yield could soon return to 5% — a level that has been breached only a handful of times over the past decade, most recently in late 2023.

So, it’s global.

Oddly …

Treasury yields have been climbing since the Federal Reserve in September kicked off its interest-rate cutting cycle with an outsized half-point move.

That’s not what was supposed to happen! It’s the opposite of what was supposed to happen. And that tells you something. The Fed has lost control of the ball.

And for the national debt, interest rising when the Fed is trying to make it fall (which is what you do to ease the debt burden and maintain national creditworthiness) could be a calamity.

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