Episode summary
How Inflation and Fiscal Policy Are Driving US Treasury Markets
The Markets
· · 12 min · Guests: Mike Mitchell
Summary
Mike Mitchell says the latest CPI report was close to expectations, but soft enough in the details to slightly lower the market’s path for inflation and keep the Fed on hold in September. He points to softer software prices and the potential for PPI and additional September inflation data to matter more than the labor market, which he describes as tepid but not alarming. He argues the labor side is not the main story for the next Fed meeting; inflation is.
On Treasury markets, Mitchell says fiscal deficits and heavy supply are pushing term premium higher and will likely continue to do so for years. He also sees corporate issuance tied to the AI build-out adding to the pressure. Against that backdrop, he thinks long-end Treasuries remain vulnerable, especially after the highest-yielding 10-year auction since 2007, though softer inflation data can still support demand at auctions.
His preferred expression is a steepener: he thinks the front end and belly are close to fully pricing the Fed, while the back end faces persistent headwinds from supply and fiscal concerns. Even so, he says long-duration Treasuries still offer attractive real yields and diversification value if growth weakens.
Key takeaways
- Mike Mitchell says the CPI print was roughly in line, but softer software data lowered the implied read-through to core PCE and helped bond prices rally.
- Mitchell says the Fed is unlikely to move in September unless upcoming PPI and additional inflation data surprise to the high side.
- Mitchell says fiscal policy and heavy Treasury supply are raising term premium and should keep pressuring longer-maturity yields over time.
- Mitchell says AI-related corporate issuance, possibly $250 billion this year and as much as $400 billion next year, is adding to the same supply pressure.
- Mitchell favors a steepener because the front end looks fully priced while the back end still faces long-term headwinds.
Notable quotes
“The report was roughly down the middle. 21.5 basis points for core CPI, but the read-through, I think to core PCE was a little softer than that”
“It is not booming. Equally, it's not flashing warning signs about recession. It's not the focus of investors. It's not the focus of the Fed”
“It's my view that it will continue to drive further increases in term premium in the coming years”
“We think it'll be upwards of $250 billion this year, perhaps as much as $400 billion next year”
“The trade I like is the steepener”
How the episode opens
This is The Markets. I'm Mike Washington. Today is Wednesday, August 12th, and I'm on the Goldman Sachs trading floor, joined by Mike Mitchell.
Mike is the head of US Treasuries and Inflation Trading within Global Banking & Markets. Mike, it's great to have you. Thank you for having me.
So, we're through the heart of earnings season, and I can tell you from the equities floor, there's been a material shift from the micro into macro. We had a CPI print this morning. To me, it looked like it was right down the fairway.
What did you take away from the print? Yeah. The report was roughly down the middle.
21.5 basis points for core CPI, but the read-through, I think to core PCE was a little softer than that. Specifically the software category has a bigger weighting in PCE than it does in CPI. That category was softer today.
And so most forecasters were revising their forecasts lower off the back of today's reading. I think for the Fed, it should give them some comfort. They still have to get through a PPI report tomorrow without a big surprise to the high side.
They have to get through another month of inflation data in September, and that's all ahead of the next meeting in September. So the market reaction today I thought was appropriate. We had a little bit of a rally in the bond market.
We had a couple of basis points shaved off of the September meeting, which is now pricing nine basis points. Given that you still have to live through several other inflation readings before you can be confident about that September meeting, that felt about right to me. Yes, we have to go through a couple inflation prints, but I think we also got to go through some employment prints, right?
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- inflation
- federal reserve rates
- us treasury markets
- fiscal policy
- treasury supply
Companies and tickers mentioned
- Goldman Sachs
Watch the episode
Watch “How Inflation and Fiscal Policy Are Driving US Treasury Markets” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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