Bonds!

[rogermunibond]

Markets rally, bonds sell off.  3%+ GDP in 2026

[TwoCitiesCapital]

1 hour ago, tede02 said:

Polymarket currently says there's a 73% chance the Supreme Court rules against the Trump tariffs. If that is the outcome, do you think the bond market reacts with rising rates under the assumption the deficit worsens materially with the lost revenue? That seems like a real possibility. Then again, I wouldn't be totally surprised if the market kind of shrugs either. Been on my mind.

 

If the tarriffs were ever material to begin with, this would be the case. 

 

But tarriffs revenue is estimated at what? Like sub-$200 billion on a ~$2 trillion deficit? Treasuries didn't blow up when Trump cut taxes again to the tune of hundreds of billions a year for the second time. They didn't blow when he arbitrarily gave Argentina $40 billion. I don't think they'll blow up to us going back to the status quo of 2024. 

[tede02]

Seems like the consensus number is more like $350 billion which isn't chump change...I mean, it moves the needle on the deficit. That said, I won't be surprised if long rates don't move a ton but I could also see a scenario where they jump 25+ bps. 

[gfp]

Government bonds aren't priced off the deficit, they are priced off market expectations for economic growth and inflation.  You should want longer term government bond yields to increase because that would likely mean healthy GDP growth.

 

When interest rates go down, bad things are usually happening.

 

I'm sure there will be some reaction the minute news comes out of the supreme court.  But then the administration will pivot to trying to accomplish the same thing in a different way.  A bunch of time will pass when nobody knows how it will all shake out.  And ultimately bonds will be priced based on economic growth and inflation.  Not "supply" or the deficit.

[Gregmal]

When does the “soaring rates” and “bond vigilante” crowd show up again? Thinking it’s sooner than the previous magic number(for reasons I still haven’t become aware of) of 4.50 on the 10 year.

[rogermunibond]

Slide deck from Torsten Slok at Apollo.  Are long rates the dog that hasn't barked in Sherlock Holmes or are they starting to warm up with some interesting New121025-Charts.pdfdivergences from the norm?

 

 

Edited December 10, 2025 by rogermunibond

[gfp]

Everyone trading the 10 year treasury is looking at the same chart, expecting a move to 4.375% TNX fairly soon.  Sometimes when everybody is expecting the exact same thing it doesn't do that thing

[rogermunibond]

The current Treasury secretary, when not cosplaying as a soya farmer, has mostly stuck with the practice of the previous Treasury secretary with regard to Treasury issuance, which the current Treasury secretary was highly critical of, thus somewhat suppressing the long end.

[wabuffo]

The current Treasury secretary, when not cosplaying as a soya farmer, has mostly stuck with the practice of the previous Treasury secretary with regard to Treasury issuance, which the current Treasury secretary was highly critical of, thus somewhat suppressing the long end.

 

Please explain - I don't see it this way (with either Treasury secretary).   

 

Bill

Edited December 10, 2025 by wabuffo

[gfp]

I assume they are just referencing issuance being almost entirely at the short end and not increasing supply of longer term bond issuance?

[rogermunibond]

Yes, short term bill issuance strategy.

[wabuffo]

I assume they are just referencing issuance being almost entirely at the short end and not increasing supply of longer term bond issuance?

 

The US Treasury gives the market what it wants and needs. 

 

Yellen issued T-Bills in large supply because the market was desperately short of safe (from a counter-party risk) places to hold cash and was relying excessively on the Fed via reverse repo as a second-best alternative.

 

Huge pools of cash (think large corporations, asset managers, forex desks) need safety first, liquidity second, and yield third -- and safety is way ahead of the other two.   Pandemic spending flooded the global economy with cash.  But by early 2021, it was patently obvious that the Fed's balance sheet expansion (and the US Treasury's need to snap back to pre-pandemic TGA levels by August 2021 due to the debt limit toggling back on after it was suspended in 2019) was creating a massive shortage of safe assets.

 

That was mostly a shortage of T-Bills and it was obvious that without action, the US was going to experience negative rates for the first time ever.  That's why the Fed opened up the reverse repo operation in size.  From a plumbing perspective, the bathtub was going to overflow so the overflow drain had to be opened.  (The Fed is also a safe counter-party, banks aren't as the depositors at SVB learned the hard way).

 

All Yellen did in 2023-2024 was relieve that massive shortage of bills that had accumulated.   But few understand this.   There was no manipulation here.  If she didn't it would've likely have created a banking crisis (shortage of reserves).

 

Bill

 

 

Bill

 

 

Edited December 10, 2025 by wabuffo

[cubsfan]

Damn Bill @wabuffo - it's really great to have you around.

 

[gfp]

17 minutes ago, wabuffo said:

But few understand this.   There was no manipulation here. 

 

"few understand this" !   signs you may be spending too much time on X Bill!

 

I don't think the point being made above was that either Tsec was "manipulating" long end yields by withholding issuance.  The point, I assume, was that when someone is running for office and criticizing the incumbent administration, saying that they would "term out the debt" like a savvy real estate developer and then they get into office and they do the exact same thing as the Tsec they were criticizing, which is to give the market what it wants / needs.

 

You say that stuff when you are running for office (or your guy is running for office) and then you do the actual job identically to everyone else when you get in office.

[changegonnacome]

On 12/2/2025 at 5:21 PM, gfp said:

Government bonds aren't priced off the deficit, they are priced off market expectations for economic growth and inflation.

 

Its kinda circular though....as the debt pile goes higher the expectation around future inflation do too.....I think this shows up on the long end.....10yr somewhat, 20/30yr for sure......short end rates have come down and are likely to come down in the future but long end rates have and will remain stubbornly high because of this......destination seems clear the 10yr gets targeted for yield curve control by the Fed at some point.

 

Everybody is beating up on Trump for likely appointing easy money guys like Hassett etc but if a Dem is next in the WH bringing mortgage rates down is political catnip.....irresistible for a Dem or a Republican....its just unbelievably politically expedient to do so, so it will get done.

[wabuffo]

signs you may be spending too much time on X Bill!

 

True dat (unfortunately, lol).

 

Bill

[hasilp89]

4 hours ago, wabuffo said:

The US Treasury gives the market what it wants and needs.

is this the same reason why: during ZIRP the US Treasury did not issue a huge amounts of 10-30 year debt at abnormally low rates (as every pundit now in hindsight claims they should have done) - basically the market wouldn't have supported it, no one would have bought them?

 

 

 

[TwoCitiesCapital]

1 hour ago, hasilp89 said:

is this the same reason why: during ZIRP the US Treasury did not issue a huge amounts of 10-30 year debt at abnormally low rates (as every pundit now in hindsight claims they should have done) - basically the market wouldn't have supported it, no one would have bought them?

 

 

 

 

The fact that 10-year rates dropped during this time to bottom at ~1% in 2016 (pre-covid lows) suggests they WEREN'T giving the market what it wanted/needed. 

 

If Treasury was providing the right supply to what market demanded - rates wouldn't really move - or at least not the spreads between short and long. 

 

TL;DR - there was an opportunity to issue long term bonds as the demand was large enough to flatten the curve and push 10-year notes to yields unseen outside of recessions while flattening the entire curve. 

Edited December 10, 2025 by TwoCitiesCapital

[hasilp89]

15 hours ago, TwoCitiesCapital said:

 

The fact that 10-year rates dropped during this time to bottom at ~1% in 2016 (pre-covid lows) suggests they WEREN'T giving the market what it wanted/needed. 

 

If Treasury was providing the right supply to what market demanded - rates wouldn't really move - or at least not the spreads between short and long. 

 

TL;DR - there was an opportunity to issue long term bonds as the demand was large enough to flatten the curve and push 10-year notes to yields unseen outside of recessions while flattening the entire curve. 

hate to ask the obvious question, but why didn't they do it then? big whiff?

[dealraker]

16 hours ago, TwoCitiesCapital said:

 

The fact that 10-year rates dropped during this time to bottom at ~1% in 2016 (pre-covid lows) suggests they WEREN'T giving the market what it wanted/needed. 

 

If Treasury was providing the right supply to what market demanded - rates wouldn't really move - or at least not the spreads between short and long. 

 

TL;DR - there was an opportunity to issue long term bonds as the demand was large enough to flatten the curve and push 10-year notes to yields unseen outside of recessions while flattening the entire curve. 

Yes.

 

[wabuffo]

hate to ask the obvious question, but why didn't they do it then? big whiff?

 

Isn't it pointless if the Fed is buying a large quantity of long bonds by doing QE?

 

In effect, from a consolidated-sovereign POV, the central bank is converting govt obligations from long-term fixed rate (10-year bond) to short-term variable rate  (reserves) debt.  

 

Bill

Edited December 11, 2025 by wabuffo

[rogermunibond]

@wabuffo  what do you make of this reserve managment thing?  keeping markets orderly?

 

"Contained in today’s Fed release, the Federal Reserve announced approximately 40 billion per month of reserve‑management purchases of short‑term Treasury securities, starting in mid‑December, with the stated goal of maintaining an ample supply of reserves and supporting smooth money‑market functioning."

[wabuffo]

"Contained in today’s Fed release, the Federal Reserve announced approximately 40 billion per month of reserve‑management purchases of short‑term Treasury securities, starting in mid‑December, with the stated goal of maintaining an ample supply of reserves and supporting smooth money‑market functioning."

 

All things being equal, the Fed's MBS portfolio continues to liquidate (as underlying mortgages pay their monthly principal and interest).   Since the Fed wants to keep total reserves from shrinking any further (currently below its self-imposed target of $3T), the Fed must buy an equal amount each month of Treasury securities to offset this decline in MBS.

 

The Fed prefers buying T-Bills than more MBS in trying to keep its balance sheet flat.  

 

If the Fed doesn't do this, and lets it balance sheet shrink further, it risks losing control of its target interest rate due to banks bidding up the cost of borrowing reserves from other banks due to a systemwide shortage of reserves.   This is what happened in Sept 2019 (the "Repo Madness Incident").

 

Bill

Edited December 11, 2025 by wabuffo

[rogermunibond]

Is there anything weird going on with the Fidelity, Schwab, Vanguards having such large Treasury MM funds?  are they trying to move clients to diversify cash savings into non-Treasury insured vehicles like HYSAs?

 

TIA - your explanations are brilliant!

[wabuffo]

Is there anything weird going on with the Fidelity, Schwab, Vanguards having such large Treasury MM funds?

 

I haven't looked closely - but my sense is that there are two factors:

- a growth in cash assets due to the pandemic and post-pandemic deficit spending that eventually needs to sit somewhere other than bank deposits (ie - a safe counter-party).

- a one-time move back to MMF from o/n RRP - roughly $2.3T from its peak to now close to zero.  During 2023 at the peak of the Fed's balance sheet size, you would look at some MMFs and over 50% of their assets were invested in o/n RRP.  Now its close to zero.  While that doesn't affect MMF asset size, it did change the composition dramatically back to govt T-bills.

 

Its as I always say, the deficit spending self-funds the follow-up Treasury issuance.   Someone gets a social security check deposit, spends it at Amazon, Amazon buys T-Bills.   Rinse and repeat.

 

Bill