The bond market is voting against Warsh. Bond yields hit the highest since 2007
Ten year Treasury yields are up 7 bps so far in Asia and 30s are up 9 bps. The latter just hit a fresh cycle high at 5.24%. That’s the highest since 2007 and it looks like a major break could be taking place.
We have been testing the 5.20% level since October 2023 when inflation was running at 9%. Even at that time, the market believed the Fed would get it back down to 2%. Now, despite all the tough talk, Warsh didn’t act.
At the same time he correctly diagnosed that the economy is strong and the employment market is stable. He also highlighted AI capex, which the Mag7 this week showed no signs of throttling. In contast, the capex numbers have moved up again.
So what does it mean?
For starters, the US 30-year is probably the second most-important number in the financial world after the 10-year. US mortages are 30-year fixed and rising yields in both put benchmark mortgages in the 6.75-6.80% range, just a short hop to 7%, which is a level that causes some real pain.
The 10-year is the most-important number without a doubt and still has some room before the 5% it hit in 2023 but the momentum is certainly to the upside.
The message post-Fed is that the market doesn’t think Warsh is actually serious about raising rates and getting inflation to 2%. It’s a sign that he’s behind the curve and could be woefully behind by the time the next meeting rolls around on Sept 16. Obviously he’s not getting any help from Trump’s war in Iran, which is showing no signs of ending.
For other markets, it’s also a problem. The days of the Mag7 running with pristine balance sheets are over. Debt and hidden debt is rising rapidly to fund AI and this could put the brakes on. Already, CDS and spreads on high-quality tech companies are widening rapidly. This will compound it.
This also threatens to super-charge the dollar rally at a time when it’s already a problem in the US and much of the world.
This is all-around just a bad signal at a vulnerable time for markets.
This article was written by Adam Button at investinglive.com.