"I am the house now": Bessent is Beating Bond Markets... for Now

Scott Bessant is testing the bond market and winning. That's what the situation seems to look like here as we approach the middle of a week where we are going to test with vigor. the architecture of yield suppression that these markets have been so focused on since the middle of August and of course the interplay between that and a Federal Reserve that it's getting beckoned by energy prices to raise interest rates. That tension on full display in the markets today. We're going to get right into it. I'm Iasac, head of global macro here at Tasty Live and this is Macro Money. uh the critical question uh of course uh here what all of this means for the full breadth of assets and the price action is going to tell us that first and foremost. So we start with a look at the one thing really on a tear here today. crude oil moving sharply higher, taking out those highs from late July and starting to push further into uh the sort of upper end of the levels where it's been since the start of the US and Iran war as hostilities there heat up. the US shooting uh five Iranian tankers, Iran shooting uh at a variety of US vessels and bases and uh by their rhetoric seemingly girding for a bigger fight. The situation of course as ever invites the sort of wartime oil to inflation to rate hikes narrative that uh we've been looking at really since this whole thing started in late February. And so as we look at what this means, the natural sort of place to look first is okay, well surely this has magnified rate hike bets. And as it turns out, not so much. If we look at what's happening here with expectations, they basically are as they were in the wake of that hawkish speech that Fed Chair Kevin Walsh gave at the Jackson Hole Symposium in late August. We of course see a big spike in rate hike odds for the whole uh sort of possibility tree. Uh here the blue line we can see that's where rates remain at their current level and the orange is the probability of at least one hike. And we can see here uh that's still hovering between 80 and 90% or so. Uh the probability of two hikes by year end. That's the teal line uh one down. That's still hovering between 40 and 50%. And we can see that late August surge there for both. That's Worsh basically reinvigorating uh speculation that we are actually going to get this tightening. We notice that here that of course over the past several days there's not really any movement here. We're sitting at familiar levels. We came off the hawkish extremes that we saw last week to some extent, but since then we're sort of in digestion mode and the push in crude oil here hasn't really seemed to change very much. looking at the priced in tally for this year and next. 31 basis points on the menu for this year. And so that's of course lining up with what we just saw at least one rate hike fully discounted. Uh what looks like by December at the latest and uh some possibility. We can see here about six basis points in the direction of a possibility of a second uh hike. And then if that hike doesn't occur and that's how you get that slight under reporting in the 20 27 number you can see there it's 24 and a half basis points. So one hike fully baked in. Ostensibly, if you don't get that hike in the the cycle for this year as a second move, it is there for uh the next year. And so there's two hikes basically on uh the menu here with a slight tilting perhaps to a touch more because clearly these add up to more than 50 basis points. And so really the readout here is there hasn't been significant movement for the past several days. We're holding the hawkish uh levels where we've been. We're not really moving off that square. And that's ostensively not because the markets don't care. We can see break even inflation rates have been moving once again with crude oil. So as crude oil has surged. So too, break even inflation rates, the inflation expectations that are priced into bond markets, they've been going up sharply as well. Uh essentially revisiting the idea that uh this is an inflation risk uh and the dynamics that we'd seen when the war began in late February, early March. You can see there uh the black line which is crude oil uh surging and that uh being a driver of inflation expectations both for the five and 10-year break even until the flush sometime uh uh in May going into June. You can see there you start to get what is perhaps the most fascinating part of this equation. So, here's the flush. Inflation expectations come off with crude oil. And then right around here, it seems as though the relationship changes. Notice in early July, crude oil resumes climbing. Inflation expectations do not. As a matter of fact, they set their lows for the year even as crude is going higher. Now, they clearly seem to have re-engaged right here. But something else seems to have woken them up because clearly this relationship looked somewhat broken in particular right here. And so the question starts to be, well, why did they start to re-engage here? And is this in fact what meets the eye? Well, this waking up of inflation expectations, this happens right around August 18th and 19th. And of course that's the other part of what is on the move today. That was when Scott Bessant announced that the US Treasury will double the size of its bond buybacks uh its purchases of longterm off ther run Treasury securities uh from two billion per operation to at least four. Now that at least that's a big marker because it doesn't have to be four. It could be larger but it but the new minimum is four and that's where this occurs. Now this of course front and center on display today where the floor that was established by that action was a kind of earlier shot across the bow when the US intervened alongside Japan to boost the yen in a way that didn't require Japan to sell US dollar denominated assets. Uh and so the Treasury basically signaled we don't want yields to go any higher. Uh we want this to be where bonds bottom and then this was that announcement of the um buybacks uh being increased right here which sort of cemented the range. We've since tested it last week and tested it again today as Bessant made the announcement that we're going to get to the six billion in the first one of these operations which comes at us tomorrow. Now initially the market wanted to test whether uh Besset really meant business about holding this level and we can see that we test through the support but we ultimately hold it and that happens is we get a very successful 10-year note auction the highest yield since 2007 at 4.834% but the market absorbs it with gusto. the bid to cover 2.71 stronger than the average of about 2.5 for these kinds of auctions. And dealers, in other words, people who are going to resell these bonds, they took down just 4.3% of what was on offer. Direct and indirect biders took down 96%. That's the lowest allocation to dealers in a year. And of course that uh sort of speaks to the fact that the auction stopped through which means uh the government paid less in interest than expected. There was stronger demand than expected and you can see that in these numbers. Uh the markets wanted this issue and uh we can see uh the bond market pulled back to hold this level because this was ostensibly a strong sign of demand, a strong sign of confidence in what the Treasury SE secretary is doing and in what yields are uh on offer here. uh if the market thought yields were going higher still maybe we wouldn't have as strong of a demand but clearly the buyers of treasuries seem to think that at least for now the Treasury secretary is going to be able to hold these levels and these are good yields to lock in and so that's what we end up seeing here today and the bond market ends up holding now how this factors into inflation expectations is something that has been a fascin fasinating trade idea really since July and continues to be one here. Now, it's a bit of a messy chart, but we'll take it apart in pieces. Here is where Bessant makes that announcement and says we're going to increase the size of bond buybacks. That's this right here. Here then also is where these break even inflation rates start rising. It's not oil, it's this. And what we see here is a flattening of the 30-year to 10-year bond yield spread. In other words, the flattening of the long end of the yield curve, even as those hawkish comments from Chair Walsh at Jackson Hole, which we just saw show up in policy expectations right here, they were driving up the spread and the slope at the front end of the curve. That is to say, short end, the situation looks hawkish. the two to three the the two year to three month spread here increasing but inflation seems to be uh responding certainly not to this that would be counterintuitive to say the least they're responding to this and when we look at then how markets are responding we can see already through July there was a sense that rising real rates tracked here by the decline in the iShares TIPS bond ETF, TIP, was not the real story because gold and the dollar refused to comply. Gold refused to fall. The dollar refused to rally. And so we have the euro here higher with gold in tandem because the market seems to be looking at this part of it and saying, well, look, we've got longterm a bias to yield suppression. that's going to be long-term inflationary that undermines the dollar and boosts demand for alternatives, the euro and gold alike. Not surprisingly, what we see here uh o over the course of the past several days, gold continues to hold despite hot ISM data last Thursday and NFP data on Friday. And today when the bonds hold this level again, gold is bouncing. The US dollar was a little bit weaker earlier against uh the euro, but nevertheless it continues to uh get pinned here as the euro holds gains. Same story. You'd think rising oil, you'd think more confident rate hikes, you'd think good for dollar, bad for gold. But clearly the focus seems to be on the bond market. What it means about Besson's efforts to hold back the long end of the yield curve and that seems to be what's driving both inflation expectations and the dollar and gold and by extension silver and by extension Bitcoin uh and all of uh the sort of G10 FX complex against the dollar, the Aussie, the pound and so forth. the yen perhaps the only exception where clearly there's a story onto itself. What this means for broader sentiment still remains uh largely an open question. The S&P continues to uh consolidate as it tries to figure out what to make of all of this. We don't really get a clear catalyst. Maybe Oracle earnings later in the week are going to be uh something that moves this. uh and uh of course there is no shortage of catalysts from the macro calendar as we'll see momentarily. NASDAQ similar story stuck in a narrow range and waiting to figure out what it thinks of all of this. The big test from a data perspective on Thursday, we are going to get a ECB rate decision, but more importantly perhaps the wholesale inflation numbers out of the US, the PPI report for August, the expectations there for a slight pickup, 0.4% month-on-month headline, 0.3% month-on-month core, that's excluding energy and food. Uh and then Friday, of course, the big chunk of economic data for the week, the headline CPI numbers, the core inflation rate year seen holding 3.4 uh percent. The the um core one from 2.5 to 2.4 marking a small down tick. So interesting uh sort of uh story here shaping up. Uh and of course we're going to be watching for what all of this will do to overall um sentiment around the pushpull between Bessant and Wars here and what these markets actually care about. Also on Thursday, a $22 billion sale of 30-year bonds. And that's of course exactly where the demand test should be most interesting because that is where Bessant and company are most active as far as positioning. Then what all of this drills down to is we're sticking with the uh basket of ideas around this yield suppression trade and um sort of the debasement effects that it's having around uh the major assets. Long gold uh through the 1 ounce futures here and just increasing the size of that position as it continues to work. still short the dollar against the Aussie, the pound, the euro, the Canadian dollar, and in uh my spot FX account against the Swiss Frank. Still long Bitcoin through a call vertical here. And still long silver through call verticals and looking at maybe adding into that position as it attempts to make something of a break higher. still long the long end of the bonds ever since uh Bessence moves checked them in mid August through a TLT call vertical and still leaning a bit short on risk uh short call verticals in uh the Q's and in SPY so NASDAQ and the S&P looking for this soggginess around what's happening in markets to maybe give way to something more lasting but ultimately because we're selling calls here we really are just looking for this not to rally hard and looking to uh look for the riskreward to be paying us for decay but with a bias on the short side because clearly we're closer to the highs than the lows for the stock markets. And that is macro money for today. As ever, we are here Monday through Thursday. Uh, and uh, outside of the show, I'm commenting at Ilas Spievac on former Twitter and on Blue Sky, as well as writing for the news and insights portion of tasty.com. Macro Money returns tomorrow. Happy trading.