Episode summary
The Bond Market is Flashing a Warning Louder Than the Oil Scare
Summary
The host argues that the bond market, not the Iran headlines or oil prices, is the real warning sign for investors. He says the 30-year Treasury yield spiked to 5.24% last month, the highest level in 19 years, and the 10-year yield climbed to 4.71%, with the 5% area on the 10-year presented as a danger zone for stocks. Higher rates, he argues, make it harder for the government to finance the debt accumulated since 2008 and push annual interest costs toward more than $1 trillion.
He frames the problem as a result of years of suppressed, manipulated rates that encouraged investors to chase yield and take on more risk. In his view, once rates are allowed to rise, that dynamic reverses: bond yields move higher, stock prices come under pressure, and the cost of refinancing US debt rises further. He says that leaves the US in a fragile position, with policymakers effectively trying to keep a dam from breaking as interest expenses mount.
The host also connects the story to Japan. He says the US Treasury supported efforts to prop up the yen because Japan may otherwise sell US Treasury bonds to finance its interventions. Since Japan is the largest owner of US Treasuries, he argues that any Japanese selling could send US yields even higher. He closes by hoping for some kind of settlement or accord that could ease the pressure on rates and debt financing.
Key takeaways
- The host says the 30-year Treasury yield at 5.24% is a bigger market warning than the oil shock.
- The host says the 10-year Treasury yield at 4.71% is nearing a 5% threshold that he sees as bearish for stocks.
- The host argues that years of low-rate policy encouraged risky behavior and created a moral hazard in markets.
- The host says US interest expense is already heading to well over $1 trillion a year as debt is refinanced at higher rates.
- The host says Japan’s Treasury holdings make any yen defense that involves selling Treasuries a direct risk to US yields.
Notable quotes
“The bond market seems to be sending a big warning to Fed Chairman Kevin Warsh and to all of us as investors”
“The 30-year Treasury yield spiked to 5.24% last month. It's highest level in 19 years”
“those of you who watch this channel for a long time know that that 5% level on the 10-year, that is a ceiling for the stock market”
“The US is concerned that in an effort to raise more money to support Japan's yen, the Japanese Finance Ministry will sell US Treasury bonds”
How the episode opens
Good morning. This is Dolan Jovanovich behind the market. Happy Tuesday.
Today is Tuesday, August 4th and today I'd like to talk about the bond market. The bond market seems to be sending a big warning to Fed Chairman Kevin Warsh and to all of us as investors. And it's something that we need to pay a little bit of heed to.
A lot of folks are pinned on the Iran war and oil prices and I understand why, but a bigger threat to the stock market for sure is in interest rates, basically. Look, I have some notes here. The 30-year Treasury yield spiked to 5.24% last month.
It's highest level in 19 years. Basically, since 2007. The 2007 financial crisis, basically.
Our rates have moved to the highest level since the 2007, 2008, 2009 financial crisis. Remember, 2007 was the last year that the market was semi-normal, then it crashed and the Fed and all policy makers pushed rates down, tried to stimulate the economy, etc., etc. And issued a lot of debt.
There's been a lot of debt issued since then in America. And all that debt issuance has been done at low rates. Well, now rates are going up, so our interest payments are starting to go up, which is very, very dangerous, actually.
It's quite a dangerous situation to find ourselves in as a country. Really incentivizes a lot of actually bad behavior, some of which I'm going to talk about right now. You know, as an aside, as stock investors, the other yield, the yield that we focus first on is the 10-year yield, which popped up to 4.71% and those of you who watch this channel for a long time know that that 5% level on the 10-year, that is a ceiling for the stock market.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- bond market warning
- treasury yields
- interest rate risk
- u.s. debt interest costs
- fed policy outlook
Watch the episode
Watch “The Bond Market is Flashing a Warning Louder Than the Oil Scare” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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