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The bond market is getting one step ahead of attempts to control it.
In short, bond investors don’t really believe the latest fire and brimstone hawkishness from Fed Chair Kevin Warsh.
Last week, Warsh made some waves at the Fed’s Jackson Hole meeting where he hinted at raising rates to curb persistently high inflation above the 2% target.
(Note that the Fed has failed to hit this target almost every quarter going back decades – which might lead you to believe the Fed isn’t really in charge of inflation…)
Rates on sovereign debt all over the world rose in response.
Whatever the Fed Chair claims he will do, bond investors are expecting higher inflation – and they’re demanding higher yields to take on the risk of holding Treasuries and other major sovereign bonds.
Wouldn’t you?
To put things in context, the bond market got completely screwed 6 years ago when they bought near-record low issuance that’s still deeply underwater today.
People loaned the US Treasury money for ten years at 0.6% interest. After inflation and bond price declines, those people lost 30% on what were supposed to be the safest investment vehicles in the market.
So, today’s bond investors are just not playing ball. Rates are rising.
And Treasury rates don’t rise in a vacuum – they have knock-on effects for debt issuance and interest rates of all kinds.
They make it more expensive for every corporation to raise capital, for every new mortgage, for every municipality selling a bond to build a bridge.
Higher priced debt is a drag on the economy – and at a certain point, the stock market itself.
The fear is that rising rates will cause some kind of stock market decline.
But whatever Warsh is saying, I believe the most likely outcome is that the monetary authorities are going to be extremely accommodative as soon as there are any signs of an economic or stock market slowdown.
They won’t wait for a crash. They’ll unleash an army of helicopters dumping cash all over America’s financial system in a way that will make Ben Bernanke weep.
At the risk of sounding like a broken record: they’re not going to let another 2008 crash occur. They will swoop in with every monetary weapon at their disposal to buoy all assets. It’s the only play they have left in the playbook: inflation.
The alternative is too ghastly for politicians and bureaucrats at the helm right now to even consider. They don’t want to be the folks in charge who watch the market crash or the bond market implode. As proof, consider that both the Treasury and the Fed are actively engaged in purchasing US bonds. They’re doing so in an attempt to keep rates lower. Ask yourself: if Warsh is thinking about raising rates, why would the Fed be buying bonds? Why not just stop buying bonds, and let rates rise?
Rates are rising because bond investors are calling the Fed’s bluff. They know inflation is coming and they want higher rates to protect themselves.
The bond market is calling Warsh’s bluff. Gold is going to the moon when Warsh and Bessent are forced to act.
Best,
Garrett Goggin, CFA, CMT
Lead Analyst and Founder, Golden Portfolio
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