Stocks Plunge, Bonds Bust Some More
Down, Down, down she goes.
Stocks and bonds continued their race downhill today (bond prices down/yields up) with the S&P busting down and holding below 4200 for the first time since last spring, and the NASDAQ jolting down 2.4% in its worst day since February (meaning even worse than any of the days during the March meltdown of banks). 4200 was a much-watched level for the S&P as that put it below the level it hit in May that finally took it out of its plunge during the spring banking bust. In fact, it came to rest on the cusp of its February peak, that occurred about a month prior to the bust.
Instead of saving the day, high-tech stocks mostly joined hands to take the stock market down. Alphabet had its worst day since the Covid outbreak in March, 2020 (down 9.5% today); and that was in spite of the fact that it beat Wall Street’s expectations for both revenue and earnings.
Even though money was moving out out of stocks, bond yields still rose significantly, setting up to take that next big pump action from stocks that I just wrote about.
“Earnings are dominating the headlines, but I can’t take my eyes off the bond market,” said Ed Moya, senior market analyst at Oanda. “We haven’t seen this skyrocketing pace in yields since 1982 and that should spell trouble for stocks.”
No doubt about it. It is already spelling trouble for stocks, and worse is yet to come as today’s stock moves didn’t even appear to flow much into bonds, given the plunge in bond prices (rise in yields). That, or other pressures on bonds exceeded all the help stocks could deliver from their own outflow. The 10-YR shot back up to end just a breath below that 5% level I’ve been saying is the Maginot Line.
CNBC says the move in bonds was due to investors assessing the state of the economy! What? Imagine that! CNBC and all the other mainstream financial media have been relentlessly pumping out stories saying the economy is “strong” and “resilient” because that is what Father Fed tells them, and they parrot whatever the Fed says because surely the Fed must be omniscient — even though Jamie Dimon told us yesterday that perhaps people should start questioning the Fed’s omniscience because the Fed is, he said, “dead wrong!”
I guess some stock investors and bond investors listened to Dimon.
Bloomberg, however, says what investors are really looking at is the poor auction puts in place so far for the US Treasury’s next auction. I think that sounds like the most likely driver for the jump today back to the 5% yield level.
Treasury yields surged Wednesday after poor demand for a sale of five-year notes deepened anxiety about auction size increases expected to be announced next week.
There’s the rub: those big increases in US Treasury auctions to keep funding the Biden deficits. I keep writing about the Big Bond Bust because the US bond market is the heart of the entire global economy. No bond market is bigger, and no other market impacts more parts of the US debt-based economy either. Low interest empowers consumers to spend their future money in manifold ways. Low interest finances business to invest but also has been used to raise their stock values with buybacks. We just cleared the buyback blackout period, and it doesn’t look so far like that is helping stocks stay afloat, as it normally has. They are going down in spite of the increase in buybacks.
The $52 billion [5-YR Treasury] offering drew a yield of 4.899%, nearly 2 basis points higher than where it was trading moments before the 1 p.m. New York time bidding deadline, a sign that demand fell short of dealers’ expectations. Bidder-participation metrics were also weak. Dealers were awarded their biggest share of the tenor in more than a year as investor demand sagged.
In other words, the US governments primary dealers had to soak up a lot of what they couldn't presell. That has been the longtime worry for what some have called the US debt bomb — the idea that, at some point, the US cannot finance its debt without interest rates going critical and achieving their own self-expanding reaction, pushing themselves up higher.
Long-maturity yields led the way with the 30-year bond’s climbing more than 15 basis points to nearly 5.10% at one stage. It’s a resumption of a selloff that lifted the 30-year yield to almost 5.18% Monday, the highest level since 2007.
As of the writing of this article, it is back now at 5.09%
The biggest driver here is not even the Fed’s QT anymore, though that is still a big driver, but the biggest driver is the government’s massive deficits, forcing the government to conduct bigger auctions so that bond investors are worried about what yields it will take to find enough buyers to swallow all that government debt.
Auction sizes grew in August for the first time in more than two years, and another round of increases is expected at the next quarterly announcement on Nov. 1.
This government’s increase on top of the Fed’s roll-off, I’ve said all year, will blow up as a catastrophic fail for the US economy. Bonds are the bomb big enough to do that. As government’s supersized auctions drive yields out ahead of Fed rate hikes, the Fed could lose control of interest rates across the economy since going back to financing government debt could raise inflation. The Fed could try to moderate a return to purchasing government debt in large amounts to just a level that keeps rates from rising more than they want, but that would mean the end of QT, and it is highly questionable they could pull that off, given how it might impact inflation. It would be proof of another QT fail like the last one that ended in a massive inter-banking credit crisis, called the Repo Crisis.
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(Headlines for the quotes above appear in boldface among the following headlines:)