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The US 30-year T-bond yield is rising as it is becoming obvious that inflation is rising and should continue to do so in response to Trump’s tariffs. While the Fed can control the short end of the Treasury market, the long end is determined by the market, which is responding to ever-rising amounts of deficit spending by the US government and other sovereign entities around the world.

The great bull market in US 30-year T-bonds, which started on September 29, 1981, with a closing yield of 15.2%, ended on March 9, 2020, with a closing yield of 1%, following an intraday low of 0.5%. In recent weeks, it has been pushing 5%.

The two main vectors that determine the Value of the DJIA are its dividend and the 30-year T-bond yield. Empirical evidence shows that a yield under 4.5% has no impact on the DJIA Value. Thus, while both vectors had very positive impacts on the DJIA Value until Lehman, the positive driving force since then has been solely the growth of the DJIA dividend.  

Modifying the above chart by limiting the lower range of the 30-year T-bond yield to 4.5% shows in the next chart the importance of the current rise above 4.5% on the Value of the DJIA.

The rise in the 30-year T-bond yield above 4.5% and pushing 5% is overpowering the rising DJIA dividend, pushing down the Value of the DJIA down.

Throughout the last week of August, the Price of the DJIA continued to hover around the record premium to its Value of 11,056 achieved on July 23. The new absolute record of 11,311 was reached at the close on August 27. The yield of the US 30-year T bond closed at 4.92%.

In the following chart, the DJIA is seen to be very expensive. In fact, it has never been more costly in absolute terms.

The following chart shows the relationship between the Price and Value of the DJIA over the past 45 years.

Over time, the relationship should continue to provide opportunities to BUY and SELL the DJIA based on the Price being at either a discount or a premium to Value. In the short-term chart shown below, the Price of the DJIA fell well below its Value at the start of the COVID-19 pandemic in the first quarter of 2020. In 2021, the Price of the DJIA rebounded to a premium over its Value in expectation of a recovery from COVID. In 2022 and 2023, supply-chain disruptions led to rising inflation and the DJIA falling below its Value, even though dividends marched steadily upwards.

The sharp decline in Value in October 2023 stemmed from rising 30-year T-bonds as inflation rose, and Janet Yellen had difficulty refinancing US debt in the long end of the bond market. During October, the yield on the 30-year T-bond rose 5.11%, pushing down the Value of the DJIA to 32,717 and its Price to 32,418.

By shifting her refunding efforts to the short end of the Treasury market, Yellen took the pressure off the long end and the yield of the 30-year T-bond, which fell in November 2023 back under 4.5% pushing up both the Value and the Price of the DJIA. Since the start of 2024, the Price of the DJIA has remained above its Value, which has been declining with a steadily rising 30-year T-bond yield.  

Where to now?

With Trump’s BIG B------ BILL passed and full tariffs being in effect since early August, the Treasury Secretary, Scott Bessent, is still faced with the need to refund expiring US debt, as well as the newly enlarged Federal deficit. Little wonder D.J. Trump is calling for a lower Fed Funds rate in the hope that Scott Bessent will be able to refund expiring debt and new debt in the short end of the market. Or possibly from the new tariffs (taxes) imposed on US importers, whether corporations or individuals, but not on exporters to the United States.

Where will the money come from if, in the final battle, the U.S. Supreme Court agrees with the lower Court, which has declared Trump’s use of emergency powers to impose tariffs illegal? Borrowing with even higher long-term bond rates?

The strength of the DJIA seems to be coming from man’s amazing propensity to project the most recent trend ad infinitum. The seemingly overwhelming belief that our entire future will be determined by Artificial Intelligence, leading to Tech Giants being priced to perfection. As many of us Scots have learned from our forebears, “There is mony a slip twixt cup and lip”.

Considering this, I maintain my bearish outlook for the DJIA at 45,622. The earnings of both corporations and individuals should shrink as Tariffs push inflation higher. More inflation should, in turn, drive the 30-year T-bond yield above 5%, further eroding the DJIA Value below its current level of 35,038.

August Jobs Report

 Not quite what the market expected, nor what Trump wanted. After firing the messenger last month, he is unable to do the same this month, so he has again turned on J Powell.

Had Trump just accepted the reported numbers and revisions last month, he might have had more sympathy from Mr. Powell, for the Fed’s twin mandate is to maintain full employment and low inflation. The poor growth in employment masks the decline in manufacturing, which stems from tariff uncertainty that can only be considered a self-inflicted wound by President Trump.

Unfortunately, the Fed’s other mandate on inflation may hold back cuts in the Fed Funds rate until we see the full impact of tariffs, which only took full effect on August 8. We shall see, but we may be entering a period of stagflation, like the 1970s, when both long and short rates reached stratospheric levels. What sayeth the Gold Market?  

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