Wars are expensive, especially when they affect oil prices
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Inflation adjusted Oil price is actually cheaper. The yield is historically not that high.
US deficit is not because of war. Post GFC Obama brought the deficit down to $442B on 2015, from Trump’s first term the deficit is consistently growing and after COVID having over $1T budget deficit.
We have a broken government. Don’t blame on Iran war-of-choice. It is Bond market that is taking notice is the reason the interest rates have moved up. But, we are not looking at going to 6%, 7%, etc.
There are lot of fear mongering, and not deep enough thoughts.
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When the 30-year Treasury traded above 5% from ~1980 to ~2004, was that also a warning sign? Not only that, but had the 30-year Treasury existed before ~1980, it probably would have traded near 5% for the previous 10 years as well.
Looks to me like interest rates are normalizing, and by “normal”, I mean that the interest rate reflects the demand for money versus all the alternatives out there (aka supply/demand).
Now, if we suddenly see rates shoot up into the two digits area, like they did nearly 50 years ago, then THAT would almost definitely be a true warning sign. I always regret not loading up on 30-year bonds at 13+% back then, of course I had no money back then, so it wouldn’t have changed my life at all anyway. A guaranteed safe 13+% return for 30 years is a truly once-in-a-lifetime opportunity.
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The debt effectively doubled under Obama’s term. I don’t think it would be accurate to describe our fiscal problems as a post his era problem. The reality is the debt exploded during World War II and we have never really looked back. It’s effectively doubled or tripled under every President going back to Reagan. In recent times, the biggest explosion has been under Biden. Shockingly, some wanted to go even bigger with climate spending on the order of 31 trillion in the long run. But, Trump went way too big with Covid relief and the lack of accountability with where the money went out the door. I think at one point when asked, he was proposing floating out larger relief checks that what even Pelosi was proposing at the time.
Despite all the fiscal insanity, T-rates, particularly as we look at ten year, are still only reaching on par with the 50 year moving avg yield. We are in some ways normalizing yields. It feels more extreme, given the low interest rate environment going back post the the dot com implosion and subsequent recession.
What I could see playing out is the Fed’s reluctance to continue to raise rates becoming increasingly at odds with where the market views the appropriate yields. I still think it is first going to play out at the state level and the pricing of muni’s. I think the credit markets are going to be asking for higher and higher opening yields for bond issuances to pay for unfunded state liabilities.
That is a biased view in my opinion. Obama inherited GFC and the budget deficit to come out of it. Post Obama’s term we had pretty healthy economy, we enacted tax cuts and tried to juice up a good economy and started the deficit cycle. At the end of Trump’s first term again we had COVID and deficit spending to get out of it.
It is sad but every republican president in this century left office with an economic disaster. Democrats fix the economy and we end up electing people who wants to tank the economy.
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Fed is a committee where everyone has only one vote!!! So Fed is not reluctant. Stock markets want easy money but economy doesn’t need easy money.
Separately, any rate hike cycle will bring the focus on operating cash flow of hyperscalers, and their need to raise capital to fund the investments, and we could potentially see a sharp AI drawdown. And Fed will use that as an excuse to cut rates!!!
Yes, it is a widely known fact that Democrats do nothing but go around fixing economies. In fact, the Biden administration was doing such a bang up job, had he not stumbled during the debates, he was all but assured another term. All one has to do is look at the various cities and states where they run them top to bottom. They couldn’t be in better financial shape. 
There is plenty of blame to go around and no party and I do mean no party is showing any fiscal courage to put our financial house in order.
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@MarkR the reason
@MarkR not if inflation goes up to 15% as it might have done if Fed Chair Volcker hadn’t smacked it down.
The rate to watch is the yield on the 10 and 30 year TIPS which take inflation out of the mix. The highest it has ever been was during the financial panic in October 2008 when it was 3%. I bought 10 year TIPS on that date and wish that I had bought 30 year TIPS then.
Wendy
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Markets want stability. We definitely don’t need easy money. We’re going to need to band together and begin to accept that the days of the govt trying to smooth out the inevitable ups and downs of economic cycles is probably coming to an end.
By the way, the FED chair has never been outvoted in the history of the FED, and I do mean never.
Who is “WE”??? AI trade needs easy money. Today AI capex is running the growth…
Warsh pretty much dressed down his committee in the press meet. I am not sure members would let that go… Either he joins them in going for rate cut or they do it no matter what. Of course the next meeting is 2 months away and we could get 2 pretty lame inflation data and that could change things…
Unlike the past Fed Chair, Warsh doesn’t have the ability to carry his committee and bring them around to his views.
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I’m not a trader but a long term investor. The we are those not looking for a temporary sugar high. The ebbs and flows of interest rate policy matter little to me. Easy money causes speculation and bubbles. In the end, the real businesses where AI Capex has a legitimate purpose and produces ROIC, will prosper regardless of the interim interest rate policy.
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The Fed Chair has never been outvoted in the history of the Fed. Furthermore, it doesn’t really matter. A few 1/4 basis point cuts aren’t going to long term steer the direction of the economy. In terms of guiding investment decisions, it is a monumental waste of time. The credit markets are going to set private borrowing rates commensurate with the risk.
OUtside of extreme economic circumstances, are you suggesting our economic future hinges on the Fed’s rate policy decision going forward?
It’s interesting that long bond rates are rising in the market even though the feds have decided not to act (for now).
Some say this is temporary and rates will fall when the war is over.
Key question is do you believe that? If yes, you should be buying bonds and bond funds as asset values will rise as interest rates fall. But too risky for me.
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I think it is worth noting and whether it is a disagreement on systemic inflation forces or the temporary geo-political events.
I just don’t see the premium upside relative to the risk, but it’s certainly not my forte. If rates are going down, I’d rather still just own great businesses, conservatively financed, where capital can continue to grow and compound on a tax deferred basis. In fact, it eliminates the need to really even worry about Fed policy or interest rate fluctuations.
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@pauleckler I don’t believe that rates will fall when the war is over.
Government deficits are forecast to climb. The war (actually it’s a rather small kerfuffle compared with real wars like WW2) will cause increased military spending to replace spent armaments.
At the same time, the AI hyperscalers will be spending money on a government scale and will need to borrow huge amounts despite financing from their existing free cash flow.
The Federal Reserve has stopped QE. Foreign buyers (e.g. China) have scaled back Treasury purchases. That’s a huge amount of demand that has evaporated.
Nobody knows what will happen with inflation.
Even TIPS yields are rising so the bond market is pricing in a non-inflation duration premium which is currently reasonable by historic standards and could go higher.
Fed Chair Kevin Warsh says that he doesn’t want the Fed to suppress yields but wants the market to determine the price. The market has a long way to go to get used to this new regime and discover the price. These are long-term bonds which are very vulnerable to interest rate rises. A 100-basis-point (1%) rise in long-end yields causes roughly a 15% to 20% drop in price for a 30-year Treasury, depending on its coupon.
That’s why I’m not buying any more long-term bonds. The rise in TIPS yields shows that many other bond traders are thinking along the same lines.
Wendy
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We can call ourselves whatever we want, it is all just a label, and time horizon. Interest rate and the policy around it matters, especially to those with a longer time horizon.
No, in fact the exact opposite is true, the longer the time frame the less valuable predictions on interest rates really matter. In fact, I don’t think macro economists have the ability to really even predict long term. The speculation itself is almost pointless. It is true that asset prices are impacted by interest rates. Investors need to consider equity investments in terms of the premium above the risk free interest rate. But, beyond that, Fed policy and whether they are slightly higher or slightly lower or the direction matters little to the long term owners of businesses.
But if I am wrong, can you give me an example of a long term equity investment you are considering that you may otherwise pass on based on the the FED’s upcoming vote on interest rates?
I don’t wanna monger fear, but the bond market is on shaky ground.
Treasury yields are only one indicator of fiscal health:
- What was the 30-year yield in 1981? 15.21%.
- How much debt did the US have in 1981? $1 trillion.
- What was the debt-to-GDP ratio in 1981? 31%.
Suggesting that we’re not swimming in troubled waters simply because the current yield isn’t at a historic high seems silly.
Normalizing, with a little help. The US intervention to help prop up the Yen reveals a weakness that could blow up US treasuries.
"There were fears Japan would have to sell US Treasury securities to raise the USD cash to buy yen, as it battles to prop up the collapsing currency. This forced selling of Treasuries would have led to a further spike in Treasury yields. And it’s Bessent’s job – as the top bond salesman in the US – to keep those long-term yields from blowing out despite whatever else is going on. To forestall this forced selling of Treasuries, all kinds of stuff happened.
The numbers remain a secret, but the move has been confirmed by both Bessent and the Japanese Ministry of Finance: The US Treasury Department via its fiscal agent, the New York Fed, and Japan’s authorities jointly intervened in the currency market on Friday to prop up the yen, which had plunged to ¥164 to the USD by July 28."
As @WendyBG astutely noted - rates will continue rising, even after the war with Iran. Stubborn inflation will continue to pressure short-term bills, hyperscalers hyperscaling will pressure medium-term notes, and US fiscal shenanigans will pressure long-term bonds.
Then there’s the narrow spreads…With Warsh letting the markets do their thang, yields will rise.
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Just for the record, and since facts matter, it should be noted that the US had comparable inflation with other developed countries (a bit higher than some, lower than others, and spiked higher but normalized sooner), and that the US economy came roaring out of the pandemic better than most any other country in the world.
Those complaining about “how it was handled” might do well to consider how much worse it might have been.
Overall inflation during COVID was not worse than most countries; it was largely comparable to or lower than many major advanced and emerging economies. While U.S. inflation spiked faster in 2021 due to large stimulus measures, its cumulative core inflation and ultimate return to target levels aligned closely with G10 and OECD
And
The **[United States], [Finland], and [Portugal] had the best economic recoveries after COVID-19. \[[1](https://www.arete-wa.com/post/covid-recovery-the-u-s-vs-the-world)\]
Maybe those hyperventilating about what went on should just take a breather, eh?
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