Yesterday, we looked at this chart of the 10-year yield.
Despite 75 basis points of easing from the Fed since September, bond yields have moved aggressively higher, not lower.
And we came into this morning’s October inflation report testing this big trendline. The inflation number did nothing to change the rate path for the Fed (i.e. trajectory lower), but yields finished higher on the day, again.
And now the benchmark 10-year yield is trading above the election day highs — to the highest level since July 1st.
In my note yesterday, we talked about Scott Bessent’s view on the bond market risk. I was mistaken in saying he was formally named Trump’s Treasury Secretary nominee. He wasn’t, but he’s the likely nominee (maybe named tomorrow).
Let’s continue the discussion on his concern about the current Treasury Secretary’s management of the economy, in a way that trades short term gain (in attempt at political gain) for medium and long-term economic pain — leaving the pain for the new administration.
As you can see in the right side of the chart below, the government has been funding the largest deficit spending in peacetime history, by issuing an unusually large proportion of short-term debt (Treasury bills, the blue bars).
By funding more of the deficit with shorter dated Treasury bills over the past year, Yellen paid more to borrow, as short term rates were higher than long term rates (an inverted yield curve).
But by focusing on Treasury bills, and limiting the increase in longer-term bond issuance, Yellen was able to influence longer-term interest rates lower or prevent them from rising further.
Bessent has made the case that this looks like Yellen purposely manipulated financial conditions through this strategy to “goose the economy.”
And now, for the new administration, these short term Treasury Bills will have to be refinanced, creating risks for rate volatility and “the potential for a financial accident.”