Weekly Wrap: The Bond Stupidlantes Show Up
This is the Breitbart Business Digest weekly wrap. It’s Friday again, which means it’s time for our latest roundup. We’d share more, but the longer intro we had prepared was bought back and shelved by Scott Bessent.
This week kicked off with rising concerns around long bonds, followed by worries that the Treasury Department had begun purchasing them. When the Fed released minutes from their July meeting, few noticed how hawkish they actually sounded. Meanwhile, regional Fed banks alongside the Fed board noted a much stronger performance in the manufacturing sector than anticipated.
So, let’s dive in.
Everyone Got Worried About the Long Bond
This week, one of the more confusing things was how many in the financial media and various Wall Street analysts convinced themselves that increasing yields on long-dated Treasury bonds were a sign of heightened investor anxiety regarding inflation. Sure, yields on 30-year Treasuries reached their highest point since 2007, but that wasn’t an indicator of inflation fears. In fact, yields on inflation-protected securities didn’t increase much at all. Most of the jump in yields came from an increase in real yields—this indicates that investors are anticipating economic strength rather than weakness or inflation worries.
Treasury bonds vie for investor funds against other securities. When investors believe the risk-adjusted returns on other opportunities are improving, they demand higher returns to buy government bonds. This shift in the secondary market means investors are willing to pay less for bonds held by others, causing yields to rise. So, if inflation expectations aren’t climbing—something you can check by looking at Treasury Inflation-Protected Securities or TIPS—then rising yields actually suggest that investors expect better economic performance, with more profits and growth.
The stock market seemed to figure this out some time ago, which explains its strong performance. Normally, buoyant stocks and a generally optimistic economy correspond with falling bond prices and rising yields. Conversely, declining stock prices typically align with rising bond prices and falling yields, as investors seek safety. But during the Fed’s extraordinary monetary measures, this connection broke down, with bonds and stocks moving in tandem. What we’re currently witnessing is a reversion to a more typical, healthy financial market. Yet, due to Trump Derangement Syndrome, this has been interpreted as some sort of crisis.
The Treasury Said It Was Going to Buy Some Long Bonds
A few years back, Janet Yellen initiated a bond repurchase program. This can be thought of as a sort of asset exchange. The Fed buys older bonds that aren’t traded much anymore while issuing newer, more actively traded bonds. Investors who prefer not to hold on to less liquid “off-the-run” bonds can sell them to the Treasury and reinvest in the more liquid “on-the-run” ones.
This usually doesn’t draw much attention since it mostly matters within the intricate workings of finance. It enhances bond market liquidity, which used to be a big concern, though it seems to have faded lately. Dealers—banks and securities firms participating in auctions run by the New York Fed—appreciate this as it keeps their balance sheets devoid of illiquid bonds. Additionally, the Treasury can sometimes make a bit of profit from the repurchase that occurs at a discount due to lesser liquidity.
However, when the Treasury declared this week that it would double the amount of 20- and 30-year bonds it intends to purchase from $2 billion to $4 billion per reverse auction, many analysts suddenly took notice. The responses were quite contradictory. Treasury Secretary Scott Bessent was criticized for attempting to force market conditions, while others claimed that this was impossible and that Bessent would surely fail. Still, there were claims suggesting this indicated a looming drop in demand for long-term Treasuries.
The issue with these perspectives was that they all seemed illogical. The Treasury understands that purchasing more bonds that haven’t been trading frequently won’t significantly affect yields in the long run. Assuming this was the operation’s purpose is misguided. And since these bond purchases don’t decrease the overall indebtedness or systematically alter the maturity of U.S. government debt, they’re not truly a “rescue” or remedy for market issues. This isn’t quantitative easing; it’s more like a trade-in arrangement for bonds.
So, we take it back: the real absurdity wasn’t the financial media fretting over rising yields. Rather, it was the panic over a $2 billion increase per operation in a market that trades tens of trillions in Treasuries daily.
Hold on a Minute: Hawks Were Hiding in Plain Sight
Many in the market and the financial media seem to have underestimated just how hawkish the minutes from the Federal Reserve’s July meeting turned out to be. A cursory glance noted that nine of the 12 voting members were in favor of maintaining the federal funds rate. However, the internal divide wasn’t simply between those who wanted higher rates versus lower rates. It pitted those advocating for an immediate rate hike against those preferring to wait for clearer evidence before increasing rates.
Three officials—Beth Hammack, Neel Kashkari, and Lorie Logan—dissented in support of a quarter-point rise. More tellingly, “many participants” suggested that policy tightening would likely be necessary if inflation didn’t decrease. Some expressed concerns that financial conditions might not be restrictive enough to bring inflation back to two percent. A few favoring an immediate increase contended that acting now could preclude more significant, economically burdensome subsequent hikes. There wasn’t a faction arguing for a rate cut.
It seems like the market fixated on the condition: rates may need to rise “if inflation doesn’t decline.” Since inflation reports post-meeting have been relatively mild, traders began to view this condition as less likely to occur. That makes sense in terms of forecasting, but it misses the Fed’s underlying stance. They are ready to act swiftly if inflation improvements falter, and most of the groundwork for another hike is already laid.
From our interpretation, the minutes depict a Fed with a hawkish outlook, even if its basic forecast anticipates that inflation will gradually ease off. This implies that it wouldn’t take much to push the Fed towards a rate hike. Perhaps just a disappointing inflation report, maybe driven by renewed pressure on gas prices because the situation with Iran isn’t exactly resolving. With markets assigning roughly a one-in-three chance for a September hike, investors might be a bit overconfident about the recent favorable data while not adequately considering what the Fed has clearly indicated it is ready to do.
This shouldn’t be too surprising. Kevin Warsh himself has been somewhat hawkish. How often does he need to emphasize his commitment to returning inflation to the Fed’s two percent target before we all start believing him?
The Manufacturing Boom Keeps on Booming
This week, two regional Federal Reserve surveys provided unexpectedly strong insights into manufacturing. The New York Fed’s Empire State index increased by five points to 20.6 in August, significantly surpassing expectations and marking its highest level in over four years. Indicators like new orders, shipments, unfilled orders, employment, and hours worked all saw gains.
The Philadelphia Fed’s index also rose to 47.4 from a previously higher 41.4, exceeding forecasts that anticipated a drop to around 25. Employment reached its highest point since April 2022, while new orders and shipments remained robust, despite slight moderation from July. While regional surveys can be erratic, the simultaneous strength seen in both New York and Philadelphia adds to the belief that American manufacturing is gaining traction.
Additionally, there was a report from the Fed board on industrial output indicating that national manufacturing output rose by 0.2 percent in July, following a revised increase of 0.3 percent in June, and reflecting a 1.2 percent rise compared to the previous year. Delving deeper, production excluding motor vehicles increased by 0.4 percent, durable goods output jumped by 0.7 percent, and business equipment production climbed by 0.8 percent in July, marking a 6.6 percent rise over the past year. Overall, the continuance of manufacturing expansion is apparent in sentiment, employment, and actual output.
When America Decided to Claim a Big Island in the Ocean
People often panic when Trump mentions Greenland. But he’s certainly not the first president to eye a strategically positioned island and wonder if it should belong to the United States.
On August 21, 1959, President Dwight Eisenhower signed the proclamation that Hawaii became the 50th state. Congress had approved the Hawaii Admission Act five months prior, concluding a decades-long push for statehood. Hawaiians overwhelmingly voted to join the Union, with over 94 percent supporting statehood in a June referendum. At four o’clock that day, Eisenhower declared Hawaii met Congress’s requirements and was admitted “on equal footing with the other States.” Aloha!
Statehood marked a lengthy and often contentious political evolution. The Hawaiian monarchy was toppled in 1893; the islands were annexed during tariff advocate William McKinley’s presidency in 1898, and Hawaii became an official American territory in 1900. However, this process began even earlier, back with the arrival of Yankee Christian missionaries, mainly from Connecticut, who converted the island’s leaders and populace from their previous, rather harsh belief system.
The annexation during McKinley’s term wasn’t without its disputes. He initially sought to formalize annexation through a treaty with Hawaii, but failed to secure the required two-thirds Senate majority for that. Instead, Congress approved the annexation via a joint resolution demanding only simple majorities in both chambers. Critics claimed that a domestic law couldn’t extend American sovereignty over a foreign nation and that a treaty or the consent of the Hawaiian individuals was necessary for such a move.
