— “Higher for Longer” last  October sent the yield on the 10-year US Tsy. note up to 5% … an odd reaction.

— The 1/2% cut in the Fed funds rate this September sent the 10-year rate plummeting to 3.6% … also an odd reaction.

— Yesterday, November 15, 2024, the note closed yielding 4.445%, 56 basis points from its high a year ago … a not-so-odd reaction

— Are those pesky “bond vigilantes” back in the saddle?

“Higher for Longer” sparks flight from safety

Last fall when Chairman Powell continued to tell investors that rates would likely remain “higher for longer” the statement sent stocks into free-fall. Investors seemed to think that this would finally be the hammer blow to send the economy into recession. He was true to his word on this as the first Fed fund rate cut would take another year to accomplish. The recession never came. Over in the Treasury market a different story was being told … they got it right. The 10-yr. Tsy. note price collapsed as the yield rose to 5%. The ultimate flight-to-safety asset was being sold. It seems the bond market figured the economy was a lot stronger than the pundits believed. It was a time to take on risk.

September 2024 rate cut sparks flight to safety

The narrative seemed to change in September. The cut may be too late to stave off recession or the fact that they took 1/2 % (instead of 1/4%) meant that the economy was weaker than thought. Either way the initial 1/2% cut was met with huge flight-to-safety buying in the 10-year, pushing the yield down to 3.6%. The bond set got it wrong this time as the market continued on a roll, making new all-time high after new all-time high. By Oct0ber 7 rtes on the 10-year were back over 4% again.

Post-election investors continue to sell bonds

The yield on the 10-year Treasury is back to near 4.45% … just 55 basis  points from its highest level in twenty years. Stocks don’t like this picture. For one thing, in a world where inflation is in check at 2% investors should be happy with a 3.65% to 4% yield. This may not be so easy to maintain if an income tax cut (more stimulus) is passed by Congress or across-the-board tariff increases are minted. 

Another factor may have to do with the potential experiential mismatches on the cabinet nominees that  are coming from the incoming administration. My sense is that the first hint of this came when hedge fund billionaire, John Paulson, withdrew his name from consideration for the job of Secretary of the Treasury. This is serious business, an important call and must be someone with experience in the markets and economics.

Pain points in this retracement

The biggest pain point in November 15th market was in the NASDAQ composite with its high multiple tech sector taking the brunt of the damage, the index down 2.2%. Potential higher rates would be hard on high multiple valuations. In second place was the small-cap Russell 2000, down 1.42% … hit because of their sensitivity to any economic slowdown. The large-cap, high quality Dow brought up the rear, down only .7%.

“The Bond Vigilantes”

Who are they? “Bond Vigilantes are investors who sell government bonds in response to fiscal policies they view inflationary or irresponsible, …”

When you sell bonds in quantity, and in concert with like-minded others,  their prices decline and long rates go up.

This vigilante crew (really anyone who owns bonds) can be a real problem because neither the Treasury or the Fed can control them. Only perceived good economic behavior can placate them.

It’s all about the money, nothing political or personal. In their minds, you threaten the purchasing power of their bond and they will sell it.

PS. Powell’s comments about not being in a rush to cut rates were not hawkish or a change in stance. They are consistent with what appears to have been a good policy approach.

What’s your take?

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