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Most Financial Reporting On Rising Treasury Yields This Week Was Misleading.
In terms of actual numbers, the 30-year U.S. Treasury yield closed on Friday at 5.277% and the 10-year Treasury yield at 4.74%. Most analysts wrote about the rising yields of long-term U.S. Treasury bonds in fear of inflation, in a collapse of demand for long-term U.S. bonds and even in a panic in the bond market. Everything written by the financial press this week over rising Treasury yields was just about wrong.
None of that holds up to scrutiny.
The real news for TIPS is that their yields are rising as well. And, remember, nominal yields for long dated bonds contain inflation expectations, so if the financial press were correct that rising Treasury yields were due to rising inflation expectations then TIPS yields would have to be falling, not rising. But, in fact, TIPS yields are rising as well as nominal yields for long dated bonds, and this means that there are very high expectations for returns to investment in the U.S. economy, and that there are many investors willing to take on more risk in search of returns on investment in the U.S. economy — all of this is healthy economic growth, not a crisis.
It is U.S. debt that has seen interest rates rise, because of the excellent recent performance of the U.S. manufacturing sector. August data for the two main U.S. manufacturing indexes both reported strong increases for all of the main indicators. The New York Fed's Empire State index for August reported a rise of 5 points to 20.6, higher than its forecast of 9.5. The Philadelphia Fed survey for August reported a rise to 47.4, far in excess of its forecast of 25. Empire State new orders rose to 31.6 from 12.3; shipments rose to 29.3 from 12.8; employment rose to 26.5 from 11.1. Philadelphia Fed hours worked rose to 30.2 from 20.8. National manufacturing output rose 0.2% in July after a 0.3% rise in June. Business-equipment production is up 6.6% year-over-year.
Treasury Secretary Bessent announced Friday he would increase long end Treasury bond purchases in reverse auctions for 30-year, 20-year, 10-year and 5-year maturities to at least $4 billion per auction. Already most of the financial press is portraying this as bond market manipulation or an emergency intervention. In reality the market for the longest dated government securities is already massive and liquid. The interventions will only add more data points to the market's already firm read on long dated Treasuries. In actuality, these bonds are trading at a massive discount, and Bessent is reducing the American debt load at sometimes sixty cents on the dollar.
As a side note, the minutes of the Federal Reserve's July meeting were released this week. Three voting members — Beth Hammack, Neel Kashkari, and Lorie Logan — dissented from the majority and voted for an immediate 25 basis point hike in the Fed Funds Rate. According to the minutes, "Many participants noted that, assuming inflation was not to decline further, tightening would likely be warranted." They noted that the earlier a hike is taken the less painful subsequent hikes will be. Notably, no one at the meeting called for a rate cut.
However, servicing the debt load demands interest rates remain on the low side, and it also stimulates the growth needed to for America to grow its way out. Warsh has shown an affinity to allow growth to mature. Many on the Fed who are globalists will resist this strategy in favor of American decline.
Bad economic prints could arrive sooner than the bond market has priced in. Oil is currently above $70 per barrel and the situation in Iran remains unresolved. Jackson Hole is next week and Chairman Kevin Warsh will speak. Wall Street and Washington will be paying close attention. Americans have been promised a reckoning for our burgeoning national debt — now over $40 trillion — and high gold prices (closing above $4,600 an ounce) and a weak dollar are not signs of normalcy. They are signs that the day of reckoning is still looming large.
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