“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”
— Mario Draghi, 26 July 2012
Yesterday, IMHO, was a massive day for financial markets, as the US Treasury (Bessent) published this press release:
Immediately, both sides of the opinion aisle started shouting at each other whether this was or was not a first form of Yield Curve Control (YCC).
Maybe it is.
Maybe not.
But what it is to me, is one of those defining moments in (financial market) history, right up there with Draghi’s 2012 “whatever it takes” or Powell’s 2020 “in the amounts needed”.
Technically, the decision means that the US Treasury will step up its bond buyback activity from USD2billion to USD4billion per round.
However, understanding the exact mechanics of what Bessent's game plan is, is well above my pay-grade, but I think the reliably brilliant Mike Green is on to something when he wrote yesterday that “the aircraft carrier has begun to turn, it is NOT an executed turn.”
His argument, in short: by buying back the longest and most rate-sensitive bonds, Treasury is quietly pushing real yields lower without lighting an inflation fire — and if Warsh follows with a cut, the curve steepens, mortgage spreads compress, and everyone leaning short the long end risks getting run over.
Whether the carrier clears the straits, as Green himself concedes, is another question entirely.
All in all, I am sure it can be ruled out that the action taken had anything to do with this headline out a couple of hours later:
(sarcastic Quotedian-smirk.)
Finally, I insist, USD 4 Billion is not a massive number (what’s a billion amongst friends nowadays anyway). But, I think Bessent just told markets that there is a level of long-term yields Washington is no longer willing to tolerate.
In any case, the Fellowship of The Quotedian will as always listen to the markets and what they have to say.
So, let’s have a quick look at what markets said so far.
As might be expected, nominal bond yields fell, but admittedly (and rightfully?) not by too much. Here’s the US 10-year yield:
The very long end (30y) saw a steeper 10 basis points drop:
Whilst we may not yet label Bessent’s move as YCC, it is probably save to tag it as Fiscal Dominance. And the first victim of Fiscal Dominance seems a country’s currency, in this case the USD. Here’s the US Dollar Index (DXY):
Why so damaging to the currency? Robin Brooks of the Brookings Institution draws a useful parallel with Japan: once policymakers suppress the bond market’s ability to express concern about deteriorating fiscal dynamics through higher yields, that pressure has to escape somewhere. In Japan, the yen became the release valve:
If you artificially suppress risk premia in long-term government bond yields, that obviously morphs into currency depreciation, which is exactly where Japan has ended up. The key signal Bessent sent is that the rise in long yields is unwelcome, but the US is unwilling to address the underlying problem, which is rising debt and a very large deficit.
And where do investors run to when it becomes clear that a currency becomes the pressure-valve of an economy? Correct, the USD!
Oh.
Well, then the next best (better) thing, which is Gold:
Note how the price of Gold is now toying with its 200-day moving average, which we had identified as “next stop” as early as last Monday …
Finally, equity investors were completely forgotten yesterday, and for the time being, that is probably correct. Here’s the S&P 500:
Structurally, it is probably a net-net positive for stocks, especially also those heavy capex abusers, but yesterday the focus was simply somewhere else.
Of course, there’s much more, but we’ll leave it at this for today, as there is already enough to digest. Make sure not to miss next Sunday’s/Monday’s weekly Quotedian, where we’ll surely deepen the discussion.
I like to say that everything is relative. In live. In health. In finance. Etc.
Our aReS model is built on relativity (I just sounded like Einstein there!).
Yesterday, shares in Moderna were up 176% on the back of successful late-stage trial in skin cancer treatment (hooray!!):
That’s a massive candle there.
But…
Zooming out, we note that everything is relative:
Stay tuned … (and relative).
Germany - PPI
Eurozone - Unemployment
US - Jobless Claims, Leading Index
Earnings - Walmart
Everything in this document is for educational purposes only (FEPO)
Nothing in this document should be considered investment advice
Investing real money can be costly; don’t do stupid shit
Leave politics at the door—markets don’t care.
Past performance is hopefully no indication of future performance
The views expressed in this document may differ from the views published by NPB Neue Privat Bank AG