Bonds/Bond Yields Present New Risk

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Our View

Aside from the extreme stock market complacency and geopolitical events hanging over the S&P, there is another very serious problem showing up that could be a major stumbling block for the US economy and it’s a five-letter word: BONDS! 

Dapu — a trader in the MrTopStep chat room — said that last week's bond auction got a D rating. This is something I think you need a lot of higher learning to understand…who will buy our government debt? Hotter-than-expected inflation reports alongside the Fed finally admitting that lower rates are not coming anytime soon isn’t helping matters. 

We don’t need anyone to tell us that prices are stabilizing because we are on the front line. The average price at the pump for US drivers has risen nearly 6.5% in the past month, from $3.39 to $3.61 per gallon. vs. December when the average cost per gallon was $3.15. 

Yes, seasonalities do play a part in the increase, but when was the last time gold was above $2,300 during the last spring vacation or summer break? 

The Fed can try and tell us everything is OK or going to be OK, but not when the yield on the 10-year continues to rise — it’s the benchmark for borrowing rates on everything from mortgages to corporate loans. It spiked to 4.5% last week, its highest level since October, and continues to push higher. 

Clearly, the narrative changed after the CPI report about where the Fed's policy is headed. And guess what? The government has another $386 billion of bonds in May. In the first 3 months of 2024 the US sold $7.2 trillion of debt — the largest quarter on record and higher than the second quarter of the 2020 Covid-19 stimulus. Today the US government prints $1 trillion every hundred days and last week JPMorgan’s Jamie Dimon warned that multiple challenges, primarily inflation and war, threaten an otherwise positive economic backdrop. 

He also noted “persistent inflationary pressures, which may likely continue” and noted the Federal Reserve's efforts to draw down the assets it is holding on its $7.5 trillion balance sheet. “We have never truly experienced the full effect of quantitative tightening on this scale and the “unsettling” global landscape, including “terrible wars and violence,” is one such factor introducing uncertainty into both JPMorgan’s business and the broader economy.”

I told the PitBull that I think Dimon is a straight shooter and he agreed and said he's just telling it like it is.