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Friday Charts: The market is a story |
Is the bond market sentient? |
You might think so after reading about how "bond vigilantes" pushed the 30-year Treasury yield above 5% this week. |
It was a dramatic move and our impulse, as always, was to explain it by anthropomorphizing the market — projecting motives, desires and fears onto an amalgamation of prices. |
CNN, for example, ran a headline promising to explain "Why the bond market is so worried about the 'Big, Beautiful Bill.'" |
The proximate cause appeared to be passage of a budget bill whose tax cuts, if enacted and extended for a full decade (as they usually are), would likely add at least $5.3 trillion to the national debt. |
But the bond market is not a person, so it probably can't "worry" about tax cuts or budget deficits. |
Even more carefully worded reporting like Reuters' assessment that "investors worried about the country's increasing debt burden" might be overstated — because correlation and causation in markets is notoriously difficult to untangle. |
At Jim Simons' quantitative hedge fund, Renaissance Technologies, a data entry error once caused a trading algorithm to buy 5x as many wheat futures as it intended, making prices shoot artificially higher. |
The next day, the Wall Street Journal reported that analysts attributed the move to "the market" anticipating a poor upcoming harvest. |
It's not an unusual occurrence: Every headline about what's happening in markets is simply a guess at what may have caused it. |
Simons didn't bother to try. |
"Our entire premise," he explained, "was that human actors would act the same way humans did in the past." |
It worked out pretty well for him: Over 30 years, Simons' flagship Medallion Fund returned 66% per year (before fees). |
66%! Per year! |
Instructively, Simons achieved those astonishing returns by letting his algorithms make all the decisions — algorithms that were able to spot patterns of human behavior in markets without reimagining the market as a person. |
I take that as a reminder that the bond market cannot coordinate to punish fiscal irresponsibility or enact monetary justice, as the term "vigilante" implies. |
Instead, its movements simply reflect the expectations of countless investors who are constantly making all kinds of decisions for all kinds of different reasons. |
Still, metaphors like "bond vigilantes" can be a helpful shorthand when we're trying to discern patterns in the noise — which, being humans, we can't help doing. |
The collective decision making of all those investors pushed 30-year yields to 5.15%, presumably on tax-cut fears — and then back down to 5.03%, presumably on tariff fears. |
I guess. |
Let's check the charts to see what other patterns we can make out. |
Inflation is not the story: |
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The Cleveland Fed's Nowcast model sees US CPI rising 0.12% in May. That works out to just 1.44% annualized, so I think we can rule out "inflation worries" as the reason bond yields are up. |
Bonds may be decoupling from GDP: |
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Juliette Declercq highlights the unusual divergence between Treasury yields and the ISM's survey of manufacturing activity — higher yields and lower GDP is, um, not what we want. |
The reverse Laffer Curve: |
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On the campaign trail, President Trump said that his proposed tax cuts would "be revenue-neutral when you add growth because we're going to have magnificent growth." |
But history shows that rising deficit spending is correlated to slower GDP growth. "Stimulus does not stimulate," Research Affiliates concludes. |
A listicle for the US economy: |
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The Atlanta Fed has Q2 growth tracking at 2.4%, but Torsten Slok lists 10 reasons why things are likely to get worse thereafter. |
Annoyingly, they are all self-imposed. Analysts at Deutsche Bank have an even longer list — they warn it will be "death by a thousand cuts" for the US economy. |
Europe's self-imposed tariffs: |
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President Trump threatened the EU with a 50% tariff on goods this morning, which is disappointing after things had seemed to have settled down. But the EU imposes similar tariffs on itself — Luis Garicano estimates that the internal barriers to trade (country-specific rules and regulations, mostly) between EU countries are equivalent to an internal tariff of 45% on goods and 110% on services. Ouch. |
The EU stock market does not seem worried, however: |
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Bitcoin (in purple above) is up 17% over the past month, but it still hasn't quite caught up with European equities — they're up 21% on the year. |
The vigilantes visit Japan: |
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The bond vigilantes have always been conspicuously absent in Japan despite the country's world's leading debt-to-GDP ratio of 250%. |
But they may finally have arrived. This week, yields on 30-year Japanese government bonds rose above 3% for the first time on record (which dates back to only 1999 when the 30-year tenor was first issued). |
Fun Japan fact: The four longest-operating companies in the world are all in Japan, led by the construction company KongΕ Gumi, which was founded in the year 578! Not fun Japan fact: This morning's inflation data showed the price of rice is up 98% year over year. |
Foreigners are a little worried about the US: |
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Torsten Slok shows that foreign participation in 30-year Treasury auctions is at a multi-year low. But the y-axis on his chart starts at 57.5% so I guess they're not that worried. |
For when markets are closed: |
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Americans subscribe to nearly five streaming services per household now — because we love stories, of course. |
Have a great weekend, storied readers. |
— Byron Gilliam |
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