Daily Commentary

MarketMinder’s View: This is a nice look at the fact the recent upturn in bond yields seems to be mostly investors speculating on what the Fed may or may not do as opposed to widely hyped headlines around inflation expectations and deficits. Simply, real rates (the article cites several measures) aren’t up a ton as of late, which isn’t what you would expect if either of those factors were really the central issue. More to this point: Per FactSet data, the increase in Treasury yields is larger at the shorter- or medium-term part of the curve than the long end. Since July 31, 30-year Treasury yields are up just 0.09 percentage point (ppt)—scarcely a wiggle. 20-year yields? 0.12 ppt. 10-year yields have climbed more, 0.27 ppt, while 5-year and 2-year yields are up 0.39 and 0.38 ppt, respectively. Since the Fed exerts its maximum control at the short end, this movement suggests to us we are seeing markets sway on Fed actions. That is largely a sentiment function that can reverse fast. It doesn’t even need to be for all the reasons documented at the end of this piece. It could be as simple as markets pre-priced a move at the meeting, the meeting comes and reality arrives (with a hike or no). A “buy the rumor, sell the news” type of action.

MarketMinder’s View: This is basically a synopsis of conventional “wisdom” on what long-term interest rates and possible Fed hikes to short-term rates mean for markets. As such, there are some loosely sensible points, like scaling the change in 10-year yields from 2016 to now to highlight the additional reward in the bond market for people who may need a bond allocation as part of their portfolio strategy. But it also lumps in a whole lot of nonsense. For one, there is a bunch of recency bias demonstrated here in both thinking the recent upturn will persist and in assuming the present rates are high. They are indeed higher as the title presumes. But by historical standards, low rates in the 2010s are really the abnormal factor. The back part of this also presumes that the twin effects of higher rates and lofty valuations are a headwind for stocks. But neither of these factors would pass a historical test—stocks rose dramatically in the 1990s with rates around current levels or higher and high valuations. These factors just aren’t predictive, operating too much on widely known factors and past market movement, which never predicts.

MarketMinder’s View: As always, please note MarketMinder is nonpartisan. Our analysis focuses on politics’ economic and market implications only. In that vein, guess what is back in headlines: the debt ceiling! “Analysts project the U.S. will breach the $41.1 trillion debt ceiling at some point in 2027, requiring Congress to raise or suspend it before the Treasury Department runs out of ‘extraordinary measures’ to avoid a catastrophic default. If Democrats capture one or both chambers of Congress in November’s midterm election, it would open the door to a standoff as the party tries to extract policy wins from Republican President Donald Trump in exchange for averting a bumpy ride over the fiscal cliff.” We share this commentary for a couple reasons. First, warnings about a supposedly negative event to come in 2027 speaks to how dour sentiment has become recently—when headlines are hyping up possible problems next year, it won’t take much for reality to exceed expectations. Second, all this handwringing is over a well-established false fear: breaching the debt ceiling does not mean default, full stop. It is the statutory limit on outstanding bonds, but it allows existing ones to be refinanced, tax revenue covers interest five times over and the 14^th amendment requires Uncle Sam to pay Treasury interest first. The debt ceiling has been raised (often following fights) more than 100 times and is overwhelmingly likely to be this time too, whether in the “lame duck” post midterm vote or the new congress. As the latter half of the article acknowledges, “Democrats will also be hesitant to agree to raise the debt ceiling if they win the election in November, given that it represents one of their most crucial points of leverage over the White House.” This is why the debt ceiling remains a story—it is one of politicians’ favored talking points—one often used to extract concessions from opposing parties. For more, see last year’s commentary, “What to Know as the Debt Ceiling Stalks Headlines.”