weekly observations (05.27.25): rates VOL (NOT the level) is what matters -DB; "Is the Fed easy?" -DB (hint, YES); Bianco on BONDS ... index extensions coming ...
Good morning / afternoon / evening - please choose whichever one which best describes when ever it may be that YOU are stumbling across this weekends note…
First UP, as the 10yr yield closed right THE number (4.50% noted HERE yesterday), AND all the LONG BOND ‘talk’ below (not actually TOO much below) I thought I’d take a look at bonds ahead of this coming weeks month / quarter / half year (and in some places, year) end …
30yy MONTHLY: watching 4.95% bullish TLINE ….
… as momentum grinds up into overSOLD territory and frankly, another weeks work into this ‘abyss’ seems likely and at same time, am unsure if ENOUGH of a selloff can occur without some sort of official (or unofficial … ie ‘mysterious’)buyer emerging …
Now, on how we ended UP where we are and how the day and week ended, specifically with regards to focus and attention now being paid to GLOBAL long-ends, a few words and visuals ….
ZH: Dollar Crashes To 18-Month Lows After Trump Tantrum; Bitcoin & Gold Hit Record Highs
US stocks are trading lower Friday and on pace for a ~2.0% decline for the week as investors have been digesting a Moody's downgrade of US debt late last Friday, the House's passage of a budget bill that could further increase the Federal deficit, a slew of retailer earnings that suggest (for the most part) that the US consumer has been so-far undaunted by tariff uncertainties, and today's social media post from President Trump indicating that the EU could be hit with a much higher import tariff rate as soon as the end of next week if trade negotiations fail.
'Soft' Data rebounded significantly this week as 'hard' data remained resilient...
…Overall, we have seen Trade Policy Uncertainty plunge to its lowest since February this week (even as equity and bond uncertainty has surged back higher)...
Bessent's optimism prompted a BTFD surge intraday...
Additionally, Bessent attempted to calm fears over rising bond yields:
BESSENT SAYS BOND MOVES ARE GLOBAL, DISPUTES US TAX BILL IMPACT, CITES IMPROVED GROWTH PROFILE, WRONG TO THINK BONDS ARE MOVING ON US CONGRESS ACTION
And a glance at the correlation between global macro surprise data (surging higher) and global sovereign bond yields (surging higher), supports Bessent's thesis:
...and in fact the last two days have seen yields drop notably with only the long-end up in yield on the week...
The 2Y yield's moves today were wild to end the week unchanged
Rate-cut expectations dipped for 2025 but were shifted into 2026 on the week, most notably today...
… rate CUTS being pushed outta town and so the debate can and will continue to rage. Some of that debate (Team Rate CUT represented by Rosie while the other guys rep’d by Jim Bianco) below.
… Alrighty, then. Not much more for you here and now and I suppose I should offer some of my own VIEW and in that regards, well, I’d continue to respect Team Rate CUT and those with a Bloomberg and the ability to economically workbench data (I’m sure I could figure it out, too, if wanted with data from FRED and an excel, but…) and with that all in mind, I guess I sympathize MORE with … Bianco’s of the world, at least I have and continue to, for the moment.
Again, it is even MORE important, then, to read and understand why I will be wrong and folks like Dr. Lacy Hunt / HIMCO (April 18th noted, HERE) are ever MORE important for any / all the skeptics …
… However, restoring the U.S. to its historical trend rate of economic growth depends heavily on reversing the debt overhang.
The Fed has yet to cushion the economic restraint from current federal spending and adverse multipliers, the lagged effects of prior central bank actions, and the immediate demographic drag. Thus, the five convergent factors mentioned initially suggest that the risk of recession is high, and the transition to meaningful recovery will be fitful, uncertain, and labored. Such an uncertain environment of tepid or negative economic growth will be conducive to a downward trajectory of long-term Treasury rates.
That said, not yet listened TO latest and will soon … a few choice EXCERPTSTHOUGH …
… So, if tariffs push up the price of stuff at the store, it's going to show up as higher CPI and higher PCE, both at the core and at the headline level. And all things being equal, if CPI and PCE go up, there is no way the Fed is going to cut interest rates. There is no way that the bond market is going to look past that and say, well, we could start to rally bonds. Even if you believe that that might slow down the economy, I’ll point everybody back to three years ago. Three years ago, first quarter of ’22, negative GDP, but inflation was rising. What was the Fed doing in response to the negative GDP? They were hiking rates. And by the second quarter of ’22, they were hiking rates at 75 basis points in a meeting to deal with higher inflation. I think what I hear from the commentariat is, let's spend 95% of our effort talking about why the unemployment rate is going to go up, why the economy is going to slow down, why we might have a recession. And they might not be wrong. And then they'll say the 5% of their effort is our prices might go up, but we're going to have a recession, so the Fed's going to cut rates. And I'll be blunt, if the other 5% is, if prices are going to go up, good luck with your recession. They're not cutting rates. They will not cut if prices go up, they are inflation-first. They were in ’22, they will be again in ‘25 and ’26. And so if this does lead to higher prices at the store and more unemployment and lower GDP and less consumer spending, there will be no cut. Unless, you can make the case that it is such a bad reversal of the economy that it offsets whatever inflation increase we would get. Your first indication that it would be a bad reversal would be what the stock market was doing in April. But now that we're into the end of May, the stock market is up on the year, so it's not signaling that something bad is going to happen. So, I think we have to understand that we're going to get this inflation, and it's going to keep interest rates up, and it's going to keep the Fed from cutting rates, even if the economy slows.
… When the Fed is on the case fighting inflation, I, as a bond holder, can relax and don't have to get rid of my bonds, so yields don't go up. But when the Fed gives up on the inflation fight, I then start to worry about owning bonds, and I sell them. And if you want an example of that, last year, September of last year, the 10Y note was 3.6%, the Fed cut 50 basis points. They followed up in November with a 25-basis point cut in December, with another one for 100 basis point cuts between September and the end of the year. Over that same time period, what did the 10Y note do? It went from 3.6% in September to 4.8% in January. It rose well over 1% or 100 basis points. There is no other example of the Fed starts cutting rates and the 10Y goes up by that much in at least the last 40 odd years, maybe even closer. You'd have to go back to basically 1981 and the secular peak of interest rates in order to find the last time that's happened. Again, why did that happen? If you're not interested in fighting inflation, I'm not interested in owning your bonds. So, Donald Trump has to be careful. It's not an issue now, because Powell’s not going to do it. But next year, if he thinks, I'll put Warsh in, or I'll put whoever in and their job is going to be to aggressively cut rates, you could wind up telling the bond market you're on your own when it comes to inflation. We're going to stimulate the economy into higher prices, you'll abandon the bond market. That's, bond players will abandon the bond market, and the result would be just like we had in late ’24, cut rates and long rates go up. That's what we have to be careful of now. Maybe the environment changes in the next year to year and a half, that would necessitate a rate cut. But if it's like it is now, and if Trump had his wish today and the Fed came out and said, we're going to cut rates, I think the response would be higher long-term yields, not lower…
I’ll move on TO some of Global Walls WEEKLY narratives — SOME of THE VIEWS you might be able to use. A few things which stood out to ME this weekend from the inbox …
My very first (alphabetically and otherwise important) read this weekend should ‘weather and time permit’ is going to be this one from across the pond — what did you think would happen when you put the term BONDS in the title …
Fiscal concerns battered government bond markets, as the approved US House bill could further worsen US debt dynamics and sharp increases in long-term yields rattled Japan's financial sector. Trump also suddenly re-escalated trade tensions with tariff threats against the EU. Volatility lies ahead.
…The battered bonds Rising long-end real yields across markets The worries about public debt dynamics are reflected most in long-dated government bond markets. In the US, the 30y Treasury yield has risen from about 4.5% in late February to over 5%, coupled with a meaningful tightening in swap spreads. The move has been even more extreme in Japan, where the 30y yield this week reached about 3.17%, the highest on record. Dynamics in Europe have been less extreme, but yields there have also risen in sympathy. Given the fiscal worries, term premia account for a large share of these moves. While inflation expectations have also risen in most countries, real yields have been the primary driver…
…Crowding out and financial stability concerns Even without a more violent correction, the repricing that has happened in the bond market will have consequences for the real economy. Interest rate expenditures will rise for the government, as well as the private sector, reducing private investments (crowding out). One of the sectors most immediately affected is one that the current US president knows well: real estate. US Treasury yields have pushed 30y US mortgage rates above 7%, levels not seen since 2000.
The unusual sharpness of the yield move, and the valuation losses it implies for long-duration assets, can also raise financial stability concerns. For example, Japan's banks, pension funds, and insurance companies have significant structural exposure to duration risk. According to the BoJ, Japanese banks have experienced substantial valuation losses, even if these have been somewhat buffered by reductions in longer-term JPY bond holdings and interest rate hedging. Carrying the bonds in the form of hold-to-maturity, and thus not marking them to market, also helps, but is not a panacea. In addition, there are signs of stress in the JGB market, with the 35y JGB yielding almost 100bp more than the on-the-run 40y, despite an upward-sloping yield curve.
… same shop with some thoughts on 50% tariffs on EU …
23 May 2025 Barclays: Negotiation tactics and tariff risks
President Trump threatened to impose a 50% tariff on the EU. We view this as merely a negotiation tactic and retain our baseline projection. However, if the higher tariffs were to realize, they would likely weigh on real GDP growth and further boost inflation.
… AND finally, from across the pond, a view on … US drug prices …
The Trump administration has taken aim at US drug prices with a new executive order on most-favored-nation pricing. We see challenges to implementing this and explain why lower drug prices may not necessarily translate to lower inflation or more savings for the government.
…Figure 3. Prescription drug price inflation vs. headline CPI
…best in show looking at yields in / around 5% closes, looking to get into 2s10s steepener and to get short FFF6 …
In the week ahead, the welcome Memorial Day holiday will keep the US rates market closed until Tuesday – marking the unofficial start of summer. The final week of May is unlikely to see summer trading conditions given the severity of the recent price action and what it implies for the Treasury Department’s task of funding the GOP’s tax and spending objectives. While the backup in longer-dated yields hasn’t been limited to US Treasuries, the influence of the US long-bond will be difficult for overseas markets to ignore – particularly in the event that risk assets increasingly reflect the weight of higher borrowing costs across the global economy. The recent data has only served to reinforce the notion that the US economy can continue performing well despite higher rates – although the trend in housing triggers affordability concerns with the persistent themes of locked-up supply and elevated mortgage rates.
The FOMC Minutes will be scrutinized for any further insight on the Committee’s current assessment of the trajectory of the real economy. Recall that Q1 growth dipped into negative territory due to the drag from net exports. However, Final Sales to Domestic Purchasers remained strong, allaying investors’ fears about a near-term recession. Moreover, Trump’s decision to pause many of the 'Liberation Day' tariffs has also been encouraging insofar as the market has interpreted the move as signaling a more measured approach to the trade war, even if Trump's latest tariff threats pose a headwind to such an assumption. There is still a meaningful distance until the 90-day pauses expire and to a large extent, it has been the lower frequency of trade policy headlines that's afforded the Treasury market the opportunity to trade the implications from the ever-ballooning deficit. It goes without saying that supply does matter in US rates; even if it isn’t the primary determinant of the outright level of yields, it has unquestionably had an influence on the steepness of the curve. We don’t see anything that will materially challenge the steepening trend aside from an occasional tactical flattening for position squaring.
We’ll also see the core-PCE inflation figures for April, where the consensus is a monthly gain of +0.1%. Such a print would be consistent with the Fed’s inflation objective, although the current concern is forward inflation expectations based on rising tariffs and trade-war-related scarcity. We maintain that the Fed’s response to a fresh round of inflation will be to delay normalization further – leaving the September meeting as the first realistic opportunity for the Fed to cut; an outcome that is currently priced at 17 bp. We’re encouraged to see that the market-implied probability of a summer cut (June/July) has steadily declined as both the data and Fed rhetoric indicate no urgency to begin lowering policy rates.
Let us not forget the supply considerations as the market is tasked with taking down 2s, 5s, and 7s. Unlike the longer end of the Treasury curve, the front end has held in reasonably well with 2s effectively anchored to 4.0%. This dynamic bodes well for a solid auction takedown ahead of what’s likely to be solid month-end demand (recall that it is a refunding month). We’re cognizant that investors are wary of any indication of a foreign buyers’ strike in US Treasuries. The outsized response to an average tail at the 20-year refunding speaks to how ready investors are to sell duration on anything that hints of softer demand. Therefore, anything other than unquestionably strong auction stats could be associated with fresh selling and a resurgence of buying trepidation fears. Tails are a typical aspect of the auction concession process, even if the increased scrutiny is arguably warranted in light of the ongoing trade war and recent bear steepening pressure.
Charts of the Week
Compared to the current episode, our first chart shows the performance of 30-year yields in the prior three instances of a close above 5.0%. After several short-lived forays above 5.0% this year, Wednesday saw long-bond yields close at 5.092% on renewed deficit and supply concerns, marking the first >5% daily close since October 2023 – when investors were similarly concerned about larger auction sizes and required greater yield compensation to move further out the curve. Before 2023, it had been over 15 years since such an occurrence, with long-bond yields crossing into 5-handle territory in April 2006 (peaked at 5.341%) and May 2007 (as high as 5.437%) – just prior to the start of the financial crisis. In these three instances, it took 30-year yields an average of 49 trading days to sustainably return to the land of the 4-handle, though we’ll point out that in the most recent 2023 episode, it took just 9 days. For context, 2006 was 93 trading days and 2007 was 46 trading days…
…Trading View Tactical short in 10-year breakevens (entered May 14th at 237 bp) finished the week slightly in the money after dropping as low as 232 bp Friday morning. Stop level remains at 246 bp and initial target is set at the NFP-day close from May 2nd at 227 bp…
… French bank with a monthly note / recap where I always check in on RATES …
23 MAY 2025 BNP: Corporate FX and Markets Monthly - May
…USD rates: Fed still on hold, peak uncertainty looks over Fed looks to evade a recession with peak uncertainty in the rearview: We are more confident than before in our base case of a ‘slowdown but no recession’ for the US economy, upgrading its probability to 70% from 60%. Treasury Secretary Scott Bessent taking a leading role on tariffs supports our view for continued tariff moderation with China, with potential for further reductions in fentanyl-related tariffs. Businesses have refrained from laying off staff, closing plants or curtailing investment on the view that tariffs would be moderated. However, our assumption is that the effective tariff rate will still go from 2.5% to 14.6%, which should continue to dampen business confidence and investment.
Though cut slightly, our inflation forecasts remain above market pricing, reflecting a long-held conviction that shifting expectations will drive higher prices. Meanwhile, direct price impacts from tariff reductions should be countered by slightly stronger growth and a tighter labor market (because of lower tariffs). We see the chances of a downturn at 20% and entrenched high inflation at 10%.
We stick to our long-held view that the Fed will keep rates on hold this year, resuming easing only in 2026 (four cuts). Risks are balanced: lower tariffs could prompt earlier cuts while robust growth and persistent inflation may delay cuts or even spark discussion of hikes.
Yields to remain stable as rate cut pricing gets pushed out to 2026: By September 2025, we expect markets to have priced out the two rate cuts that had been anticipated this year, and push them to 2026, lifting 2y yields. We then see 2y yields tracking lower, ending 2025 at 4.00%, before the Fed delivers four rate cuts in 2026. The 10y yield depends more on the perception and news on deficits and supply-demand, and to a lesser extent on the economic backdrop.
A broadly stable deficit trajectory (albeit with a contractionary fiscal impulse), coupled with a bond-vigilant administration (see US rates: Treasury can consider cutting coupon sizes, dated 21 April), should offset some pressure from the upward drift in the Fed path and inflation. That would keep 10y yields stable in Q3, with a slight downward drift into Q4 to end 2025 at 4.25%. Moderation of long-end yields and an upward drift in the Fed path could flatten the curve versus the already steep forwards.
German shop weighing in whether or not the Fed is easy (and if they already are, well, Team Rate CUT going to continue to fight uphill battle, and I fully believe in commitment to do so…) AND a note on positions and flows which, IMO, are always good to knows …
It may sound preposterous to ask this question, given the anticipated weakness in economic activity and the political pressure on the Fed to cut rates. However, on some metrics, the answer is yes.
More specifically, the neutral rate is driven not only by potential growth, but also by "other determinants", a.k.a. the "dark matter", a.k.a. the supply and demand of savings. As argued by our US team, the combination of large fiscal deficits and a reduced willingness of non-domestic investors to fund the US twin deficits should result in a higher neutral rate. This is effectively what r* estimates derived from the bond/equity correlation suggest. In fact, the monthly estimate is consistent with r* returning to pre-GFC levels of ~2.5%. Simultaneously, consumer inflation expectations are at multi-decade highs. Taken at face value, this is consistent with a nominal neutral rate closer to 5% than 3.5%.
No estimate of r* should be taken at face value, and market based metrics of inflation expectations are more subdued. Still, equilibrium interest rates are likely to be increasing, raising the bar for the Fed to ease.
23 May 2025 DB: Investor Positioning and Flows - First Dip In Six Weeks
Equity positioning dipped this week after rising uninterrupted for six weeks (z score -0.45, 23rd percentile). The positioning of systematic strategies continued to grind higher but is still notably underweight (z score -0.76, 18th percentile). Discretionary investors who had jumped to overweight last week following the US-China agreement, cut their positioning back to modestly underweight, close to where it was in the lead-up to Liberation Day. In effect, they are back to factoring in two-sided risks from potential policy moves. As we wrote a month ago, a trade policy relent was likely to spark a sharp and strong rally but one likely restrained by fears of renewed policy aggression (Tariffs And Equities, Apr 23 2025). Investors essentially have a call spread on the market, with the strike range proving to be narrow.
Rates vol, not the level, still the key for equities. There have also been rising concerns about the impact on equities of rising bond yields, specifically via higher term premia. As in the past, we think it is the volatility of rates that will be key for equities, not their level (Higher Rates or Higher Vol? Nov 2022). So far, implied as well as realized rates vol has remained in check, and the equity response in turn relatively muted. The equity correlation with bond yields has fluctuated over time but is currently running close to zero while that with rates vol remains consistently negative.
Bond fund inflows this week surged to near a 5 year high. The strength was broad-based across categories, with broad-mandate funds ($8.9bn), IG ($4.9bn), HY ($1.9bn), EM ($1.7bn), as well as government bond funds ($5.1bn) all seeing strong inflows. Within government bond funds, US funds ($4.2bn) notably saw strong inflows and particularly into long-term funds ($4bn)…
Netherlands weighing in on DJTs 50% tariff threats … AND with a Simpsons analogy …
23 May 2025 ING: Trump’s 50% tariff threat to the EU: deal or detonation?
Trump’s latest threat to impose a 50% tariff on EU goods by 1 June has reignited fears of a transatlantic trade war. The EU’s revised offer is on the table, but talks remain fragile. A €95bn retaliation package looms – yet, as with China, a weekend deal remains possible in this high-stakes game of brinkmanship
23 May 2025 ING THINK Ahead: D'oh! The tariff and deficit wedding we almost forgot
Just when we thought it was all quiet on the tariff front and we'd all started worrying again about the US deficit, boom! Trump threatens the EU with bucketloads more. Brace yourself! Here's what's to come next week...
… There’s a bigger problem here too, which is that the US economy is set to slow considerably this year, based on James K's forecasts. Lower growth could be much more consequential for the size of the deficit than the tax bill. The fact that the US has been running a 6% deficit when the jobs market has been strong and the economy growing 2-3% annually, doesn’t bode well if – or when – conditions worsen.
Chart of the week: The 6%+ Federal deficit
2024 is estimatedSource: Macrobond
In short, concerns about US borrowing aren’t going away. And for all the angst about the tax and spending bill, the irony is that it will make little tangible difference to economic growth rates over the next couple of years.
That is a contrast to recent years, where fiscal policy has been a key driver of the US exceptionalism narrative. Covid-era stimulus catalysed a remarkable period of consumer spending growth. And the Inflation Reduction/CHIPS Act sparked big increases in factory investment (even if investment more broadly stayed more muted).
I bring this up is because the story in Europe looks pretty different. European governments – well Germany, anyway – are genuinely ramping up fiscal support this year. There will be a material boost to economic growth, though more so in 2026 than in 2025. And in sharp contrast to the US, investors appear much less fazed about what this all means for debt sustainability.
German Bund yields have been going down since the start of April, while US Treasuries have risen considerably. Within Europe itself, the spread between Italian and German debt, a traditional gauge of borrowing angst, is at its lowest level since 2021.
Switzerland calling in on the USAs tax bill and on index extension in week ahead…
23 May 2025 UBS: US Economics Weekly A new tax bill
…The Week Ahead: PCE prices and the May minutes Congress heads into recess with the Memorial Day holiday. The May FOMC meeting minutes, core PCE prices and other activity data cram the holiday-shortened week. The May FOMC meeting minutes should display the uncertainty, concern over tariff-related price increases and the worsening growth-inflation tradeoff the committee faces. The well positioned to wait message continues. We expect core PCE prices rose a subdued 0.13%, dropping core inflation to 2.57%, a likely trough before tariff related price increases mount in the coming months. We expect core durable goods orders declined for a third month in a row in April, and represent the hard data to watch for signs of any impact on business decisions from trade policy or uncertainty. We expect more noisy swings in the trade balance. The Conference Board sentiment index may improve a little on China tariff news and the final estimates from the University of Michigan survey for May will be out Friday. We expect Q1 real GDP revises down, to be more negative…
21 May 2025 UBS: Global Rates Strategy Global Index Projections for end-May
…US: Moderate Treasury extension at end-May (~0.06yr) We expect the US Treasury index duration to extend by a moderate 0.06yr at end-May rebalancing, lower than its historical 3yr end-May average (~0.10yr). This moderate duration lengthening is non-typical of refunding months due to decreased index turnover as end May 2026 falls in a weekend. We forecast US TIPS index to extend by a modest ~0.03yr at end-May. For US Treasury & TIPS sector-wise breakdown, kindly refer to Figure 10 & Figure 11…
Moderate US Treasury Index duration extension at end-May: We expect Series L US Treasury index duration to extend by ~0.06yr in the end-May rebalancing – Figure 8
Moderate duration extension driven by decreased index turnover: Moderate projected duration extension results from decreased index turnover. As end May-26 falls in a weekend fewer bonds drop out of the index at the end of this month.
… covered wagons on the week just past and the Moody’s Blues …
May 23, 2025 Wells Fargo: Weekly Economic & Financial Commentary
United States: The Old versus the New The challenges facing the housing market have yet to meaningfully abate. Our expectation for mortgage rates to soften slightly alongside Federal Reserve rate cuts could help improve affordability, but the prospects for such a move in the near term have dimmed…
…Interest Rate Watch: Moody's Downgrade Spotlights Fiscal Reality Late in the afternoon on Friday, May 16, Moody's downgraded the sovereign credit rating of the United States to AA+, one notch below the top rating of AAA. Of the three major rating agencies, Moody's was the last to have the federal government with a AAA rating. S&P downgraded the United States in 2011, and Fitch followed suit in 2023. This decision by Moody's, in conjunction with the House-passed budget reconciliation bill this week, has brought U.S. fiscal policy back into the spotlight for financial markets.
Large federal budget deficits are not a completely new phenomenon in the United States, but the fiscal outlook has deteriorated markedly over the past decade. In fiscal year (FY) 2015, the U.S. federal budget deficit was 2.4% of GDP, the second year in a row that the budget deficit came in below the 3% mark that is widely viewed as a very rough benchmark for long-fun fiscal sustainability. By FY 2019, this metric had deteriorated to 4.6% of GDP, and it exploded to a peak of 15% of GDP in FY 2020 due to the economic damage wrought by the pandemic and the robust federal response to the crisis. Although the federal budget deficit has narrowed from its COVID high watermark, at 6.0%-6.5% of GDP the deficit remains unusually wide for a country that is at full employment and is not engaged in a war.
Financial markets have taken notice. The yield on the longest-dated U.S. Treasury security, the 30- year bond, has been rising steadily over the past few years and is currently at levels not seen since 2007 (chart). We do not contribute this rise solely to the deterioration in the U.S. fiscal outlook. Other factors, such as the outlook for U.S. economic growth, inflation and Federal Reserve monetary policy also play important roles. But we suspect the increasingly grim long-run fiscal outlook in the United States is contributing to the increase in longer-term Treasury yields.
We do not think the budget reconciliation bill that passed the House of Representatives this week will improve the fiscal outlook. In the near term, we estimate that the bill will increase federal budget deficits by 0.5-1.0 percentage point of GDP over the next few years relative to current policy. Over the medium to longer term, the deficit impact is highly conditional on the decisions made by future policymakers. If the new temporary tax cuts expire as scheduled and the planned spending cuts occur in the years ahead, then the bill's fiscal cost over the longer run is reined in considerably. That said, the general track record of Congress in recent years has been to extend expiring tax cuts and punt on spending cuts. As a result, we think the market will assign at least some positive probability that the temporary new tax cuts will end up being permanent, thus further increasing the cost of the bill. Using our own economic and fiscal assumptions, we project that the federal debt-to-GDP ratio will continue to rise in the years ahead (chart).
… Moving along TO a few other curated links from the intertubes, which I HOPE you’ll find useful …
Housing always worth a look as there are far reaching consequences (aDURable goods, etc…)
Weekly data for homebuilder traffic points to a weak spring selling season, driven by mortgage rates near 7%, record-low consumer confidence, and a rising inventory of homes for sale, see chart below.
Terminal dot com …
May 24, 2025 at 5:00 AM EDT Bloomberg: Charting the Global Economy: Long-Term Bond Yields Soar Around the World
Always good to check in and see very latest on correlations and causations esp given the week just past …
05/23/25 07:32 AM EDT HEDGEYE CHART OF THE DAY: US CDS has a 0.29 Correlation to UST 10yr Yields
Below is the "Chart of the Day" from today's Early Look written by Hedgeye Director of Macro Ryan Ricci. If you're interested in learning more about how we approach protecting and growing our capital, make sure to download our free 52-page eBook below written by Hedgeye CEO Keith McCullough.
Positions matter and a weekly update without much drama, but always good to have a quick peak …
24 MAY 2025 Hedgopia CoT: Peek Into Future Through Futures, How Hedge Funds Are Positioned
Kimble’s watching utils …
at KimbleCharting
I'm keeping a close eye on Dow Jones
Utilities up here. Possible macro inflection point.
Something else hit the inbox and caught my attention … latest weekly by John MAULDIN seems a recap of his recent conference and what I like is the ying / yang differing views from Rosie and Bianco … have a look …
…Dave Rosenberg: Still on Team Transitory The near-term US economic forecast hinges mostly on trade and tariff questions, along with uncertainty over how everyone will react. Generally, views fall into three categories: recession, inflation and a “stagflation” scenario in between.
David Rosenberg is firmly in the recession camp. In fact, he was already expecting a recession even before Trump launched the current trade war. Now he thinks the trade war’s impact on consumers will be the final straw.
The US is uniquely vulnerable because our economy is the most dependent on consumer spending and has the lowest personal savings:
Source: Rosenberg Research
Here’s how Dave explained it (from the transcript).
“It's the structure of the US economy. I mean, take a look at this chart. For anybody that's saying, ‘Oh, well, the United States is being ripped off,’ no. It's simply because the United States is run on consumer spending. There's no country in the world where consumer spending as a share of GDP is as high…
“Most countries have actually a national sales tax [VAT]. You would never get that passed through the United States. You can't put a sales tax on the consumer. The consumer runs the economy. Not investment, the consumer.
“What country has a lower savings rate? What country has as much a consumption share of GDP? And there's a 95% correlation between consumer spending and imports. So, for the people that support this view that we have to eliminate all these trade deficits the United States runs, well, then maybe we have to basically take the US economy and make it more European or Asian in nature, embrace frugality, and that way we'll have less consumption and fewer imports.”
As Dave sees it, we’re about to have a collision between already-weakening consumer spending and tariff-induced price increases. The former points to recession, the latter to inflation. How will this develop? Dave expects inflation first, which will be transitory for a specific reason.
Source: Rosenberg Research
Again, from the transcript:
“Take a look at the latest New York Fed report. Only the one-year inflation expectation measure is hooked up. The three year is moving sideways. The five years hooked down, and everybody's selling their bonds. Inflation. Inflation. Tariffs are inflation. It's a price shock. It's a price shock. And I know people will laugh at transitory, but there's a reason why it wasn't transitory back in 2021 and 2022. There's a reason.
“And the reason why it will be transitory, I'm not ashamed to use that word again, even though Jay Powell won't, is because of the labor market. The reason why the inflation lasted longer than we all thought, certainly than I thought, was because it triggered at least an 18-month wage and price spiral because the labor market was tightening. And because people are getting paid to stay out of work and not work because of the gigantic mismatch in labor demand and supply, the price shock, supply price shock from COVID transmitted into wages.
“I got news for you. It ain't going to happen this time around. It's not about the 4.2% lagging unemployment rate. Beneath the surface you're seeing a big drop in labor demand, job openings down, hiring rates down, job hopping way down. Totally different complexion to the job market today.”
The difference now, as Dave sees it, is that workers are far less confident than they were in 2021-2023. This is evident in surveys showing much higher fear of job loss and lower wage expectations. These conditions won’t produce a wage-price spiral, without which it will be hard for inflation to gain a foothold. Regardless of tariff rates, Dave expects significantly lower inflation 12 months from now.
Unfortunately, the inflation will give way to recession, and here’s why. Read this quote carefully.
“… The household sector of America has never before had $50 trillion of exposure of equities on their balance sheet. Nobody this cycle has rebalanced. Diversification became a dirty 15 letter word - buy every dip.
“Take a look at what the equity ownership was going into the tech wreck. Barely more than $10 trillion. Going into the financial crisis, $15 trillion. Now we're at $50 trillion so there's a lot at stake here…
“71% of the household financial assets is in stocks. Who wants bonds? 8% in bonds. Bonds are for losers. Who shows up at the cocktail party talking about the belly of the curve? No one will talk to you. No. We'll talk about Bitcoin and the Nasdaq-100.
Source: Rosenberg Research
“But what's most important is the boomers… The median boomer is now age 70. It's not 45 or 50 or 55 as it was going into the Great Financial Crisis. And over 60% of the boomers' portfolio is in the equity market. It should be 30 to 40%. Time is not on their side. And I shudder to think what happens if this ever shrinks when you're taking a look at the biggest exposures to equities are in the wrong demographic. Nobody talks about what the future consequences are going to be, especially on the labor market.
“Because when they can see that their retirement plans with their golden goose is not going to be coming to fruition, they might be lining up at Walmart for a job only to find out that robots taking that over. So this is what a recession looks like for those that actually believe in the LEI, for those that believe in the New York Fed model. We're not out of the woods. By the way, I think that the best that I can say is that there will not be a bad recession at this point. It could have been, but I do think that we're going to be seeing at least two or three quarters of mild negative GDP.”
Baby Boomers, generally speaking (you may be an exception), are deeply overexposed to the kind of equity bear market that usually accompanies even mild recessions. Many will be fine anyway, but a significant number could see their retirement plans dashed. Some will re-enter the workforce, further depressing wages and raising the unemployment rate.
This is problematic because broad stock market indexes always fall during a recession. Rosie gave us this chart:
Source: Rosenberg Research
Dave made a compelling case for this scenario. But hold that thought until you consider a different view.
Jim Bianco: Murder Weapons Jim Bianco looks at the cycle differently. To him, recessions are not a natural phenomenon. What’s natural in a capitalist economy is for growth to continue until something stops it.
When bad companies are allowed to fail and new ideas are free to develop, the economy changes but doesn’t have to shrink. Jim quotes the MIT economist who famously said in the 1970s, “Economic expansions don’t die of old age, they are murdered.”
Source: Bianco Research
If recession is looming, what will the murder weapon be this time? At SIC, Jim went through a series of high-frequency indicators like retail sales and weekly jobless claims. This “hard data” doesn’t show much cause for concern. Of course it could change, and the “soft data” says change may be coming. But it’s not here yet.
What is here, according to Jim, is inflation, and it’s not transitory at all. It’s more like a new normal. He thinks the post-COVID inflation marked a major change.
“I would postulate that inflation moves in big cycles. The inflationary cycle started in 1965. It ended in 1991, although it peaked in 1981, but it ended in 1991 with the fall of the Soviet Union. We went into a long disinflationary period. That ended with COVID, and I would argue to you that most economists and most people don't recognize that we're in Year 5 of a new inflation cycle, and that they still think we're in the Red era [see chart below].
“When you have a recession or a financial crisis, and we had both, the economy changes. Change does not mean worse. It means different. It changed. The economy changed post-COVID.”
Jim shared this chart illustrating his point. The “normal” inflation range clearly shifted higher after 2020.
Source: Bianco Research
I’ve talked about this before. The COVID pandemic and all the events around it changed the economy in ways we still don’t fully understand. Jim thinks it pushed us into a new inflation cycle, which was already underway before Trump started imposing tariffs. But the tariffs won’t help. Here’s Jim again.
“Tariffs mean higher prices. Who's going to eat those prices? If Trump is right and if some of Wall Street are right that we have no increase in inflation coming because of tariffs, then let's pick up the chisels and start putting Trump on Mount Rushmore right now…
“If he could pull that off, if we find out that they're slapping all these tariffs on and billions and billions and billions of dollars are flowing into this country and prices aren't going up, then the Chinese are paying for it and maybe Walmart's eating a little bit of it, and Trump found a way to raise taxes on somebody who's not the rich or is not Americans, he should go right up on the Mount Rushmore. ‘Don't tax me, tax the man behind the tree. The man behind the tree is Chinese, and he found a way to tax them.
“I don't think that's the case. I think we're going to find that prices go up and inflation is going to go up, and in this environment when inflation goes up, that means that the Fed holds. So, the path of least resistance on bond yields is going to be higher, and I think that it's going to be problematic for markets.”
Baseline inflation is now close to 3%. The “neutral” inflation rate (what the Fed calls “r-star”) is around 1 percentage point higher, so 4%, just below the current federal funds range. That means the Fed’s current policy is neither loose nor tight. If inflation forces them to get restrictive, we’re looking at 5% or more at the short end and even higher at the long end, unless the yield curve stays flat.
Higher interest rates might well trigger a recession. Jim isn’t sure about that. But he’s very sure inflation won’t go back to 2% any time soon. He went through a series of market-based expectations charts showing inflation remaining high until 2030.
A 10-year inflation wave (if this one started in 2020 and lasts until 2030) is not “transitory” by any definition. But Jim doesn’t see it as disastrous. Older readers will recall 7% or even 8% mortgages were normal in the 1990s. We’ll get through it.
…That brings us back to our four BIG questions, which all arguably deserve their own piece, but we will answer in brief below.
“Called the rain to end our days of wild”: How much higher could yields go in the short term?
The great market technician, John Roque, wrote recently about the chart of global 30-year yields, “if these were stocks, you’d be long”, effectively saying yields are biased higher.
As 30-year bond yields break out and make new multi-decade highs, it raises the question of how high U.S. 10-year Treasury yields could go as well. 10-year yields remain below their recent highs, but we would not be surprised to see a retest of 4.8-5% on the 10-year given recent price action.
Recall our outlook for the 10-year at the beginning of 2025 was a wide, choppy range (like equities), where we saw the yield potentially touching both 3.5% and 5% over the course of the year on the potential of experiencing both growth fears (pushing yields lower) and deficit fears (pushing yields higher).
U.S. 10-Year Treasury Yield with RSI
Source: Bloomberg, NewEdge Wealth 5-22-25
But just as the old commodities phrase goes, “the cure for high prices is high prices”, we would likely see structural buyers of bonds near 5%, as the high yields would provide a substantial buffer for potential further price loses (we saw buyers step in at 4.80% and 5% over the past two years).
Given the moves to new cycle highs for 30-year bonds, we can’t rule out a breakout above 5% on the 10-year (this would likely require a reacceleration in growth and/or inflation, plus a fiscal deficit bonanza). This would be a thoroughly jarring development for global markets, making a close monitoring of the 10-year yield at these various resistance levels an imperative.
On the flip side, we must note that rates could show renewed sensitivity to incoming economic data if it begins to weaken over the summer under the weight of tariffs. As the chart below shows, rates have diverged from Economic Surprises in recent months. This could reflect the deficit concerns, but also likely reflects that most of the economic data weakness has been contained in “soft data” that has not made its way into real “hard data” yet.
As of 5/22/25
Rosie’s weekly recap, dropping into the inbox lately — think its new and always great tidbits … this weeks chart on housing caught MY attention …
The Rosenberg Recap -- Burning Down the House
Chart of the Week Burning Down the House
The fact that single-family housing starts dropped by -2.1% in April and are down a whopping -12% year-over-year to a nine-month low is the clearest sign of how the economy is in desperate need of interest rate relief. Not to mention Thursday’s disaster of the NAHB survey that came out for May. The fact that single-family building permits slumped -5.1% in April after a -2.0% March slide (now -6.2% on a YoY basis) to the lowest level since April 2023, is a leading barometer for further pain in the housing market, which is betting for rate relief but is not getting any as the tariff file and budget shenanigans are getting in the way.
Normally, weak data like this in the most interest-sensitive part of the economy would be coinciding with lower Treasury yields, but the gaping fiscal premium at the long end of the curve is preventing this from happening and sending the residential real estate market into a bit of a tailspin.
The builders are doing all they can to remove the sting with mortgage rates stuck near 7%, but even the subsidized loan “sweeteners” aren’t doing all that much. Pending home sales through April so far have been very soft. PulteGroup was the latest to lament that new orders from first-time buyers dropped -11% in the first three months of 2025 compared with a year earlier. Builders now have more completed but unsold homes on lots than at any time since 2009, so the future here is going to be asset deflation for the prized possession on most household balance sheets.
…We will be closely watching the FOMC’s Minutes for any clues to their “cautious outlook” next week - and awaiting the PCE release on Friday for insight into both prices and consumer spending. Here’s what else is on the agenda:
No data on Monday.
One of the more interesting releases of the week will be the FOMC Meeting Minutes (Wednesday).
Key GDP components and indicators will include the preliminary Durable Goods Orders (Tuesday), Personal Spending and Income (Friday), and Monthly PCE (Friday) data.
We will see if the deteriorating housing outlook shows through in the FHFA & Case Shiller home price indices (Tuesday) and Pending Home Sales (Thursday).
Crucial surveys will come in throughout the week, with the Conference Board’s Consumer Confidence (Tuesday), the Dallas Fed’s manufacturing (Tuesday) and services (Wednesday), the Richmond Fed’s manufacturing and services (Wednesday), and the final UMich consumer sentiment data (Friday).
Canada’s output picture will come into focus — informing next month’s Bank of Canada meeting -- with Canada’s industry jobs report (Thursday) and Canadian Q1 and monthly GDP (Friday).
AllStarCharts (JC Parets) now callin’ himself Trendlabs or whatever — America’s chart whisperer ?? seriously, dude??) … a couple thoughts on bonds and so …
May 24, 2025 Trendlabs: Everybody’s wrong. Tariff Man: “Watch This!”
Treasury Man and Tariff Man have a chat.
The president knows how to tweet.
Bond yields are the key to speculative growth stocks.
So, Treasury Man walks over to the White House for a quick chat with the boss…
“Tariff Man, we need to do something about these high rates…”
Tariff Man says, “Watch this…”
And, with one tweet, Tariff Man destroys rates
Bonds rip…
Just like commercial hedgers were positioned.
Of all the things commercial hedgers are buying, US Treasury bonds are at the top of the list — particularly the 5- and 10-year notes.
Everybody’s Wrong Part 39
Everybody’s wrong.
They think the Federal Reserve lowering rates means lower rates, lol.
It’s been the opposite:
Yields only started to go up when the Fed started to cut its benchmark back in September.
Yields Are in Trump’s Hands, Dude
Before Tariff Man’s tweet this week, yields were ripping all over the world.
Thirty-year Japanese government bond (JGB) yields have been the talk of the town:
So, why do we care about bond yields and the JGB?
Why does this matter?
Why is the direction of yields so important?
I mean, we’re joking about the President of the United States sending a tweet designed to bring down interest rates…
But this is serious business.
These yields are tied to a lot of things.
Most notably for our purposes, they’ll impact the direction of speculative growth stocks…
… and some GOOD news on gas prices front (although, prices seem more UNCH — $2.79/gal reg at COSTCO here in NJ) …
ZH: US Gasoline Prices Heading Into Memorial Day Weekend Are The Lowest Since COVID
… AND for any / all (still)interested in trying to plan your trades and trade your plans in / around FUNduhMENTALs, here are a couple economic calendars and LINKS I used when I was closer to and IN ‘the game’.
First, this from the best in the strategy biz is a LINKthru TO this calendar,
A question for Mr Bianco, if tariffs are inflammatory, why do Long Yields decline
every time Trump threatens tariff increases ??
That seems to signal that the tariff impact is more deflationary.
Also, I would point to HD's recent earnings report and their Pricing Guidance.
No price hike...some products discontinued.