US 30yr Treasury yields hit 5.43% yesterday, a 22-year high. UK 30-years reached 5.87%, a near 28-year high. Japan's 10yr yield touched 3.08%, its highest since 1996.
Three of the world's biggest bond markets, three multi-decade records, all in the same 24 hours.
That's not a coincidence. That's the same inflation scare hitting every government bond market at once.
The trigger: Wednesday's US business activity survey showed private-sector growth at a five-year high, with services-sector input costs rising at their fastest pace since October 2022. Jefferies' Mohit Kumar summed up the mood: "There appears to be a lot of pain on the street in fixed income."
Equities didn't escape either. The S&P 500 clawed back an intraday slide to close just 0.09% lower, but the Dow and Nasdaq both fell as the bond rout spread into stocks. London's FTSE 100 fell 0.2%, unable to shrug off a fresh oil spike that touched $107 a barrel intraday.
One stock is bucking the trend entirely: Meta was up 4.5% yesterday, to $779, even as the bond rout drags nearly everything else lower. That extends a run of roughly 13% over since the launch of Muse, and it's holding straight through this week's Connect announcements. When rising yields are hitting almost every other stock, that's a genuinely rare show of strength.
The diesel flashpoint
Diesel is the sharpest edge of this story. Trump mentioned restricting US diesel exports on Tuesday, chasing votes ahead of the midterms, as retail diesel prices hit a record $6.50 a gallon. But by Wednesday afternoon the White House was already rowing back: Energy Secretary Chris Wright said there's no outright ban, just a "voluntary, cooperative" push with refiners to boost domestic supply, with no specifics offered.
Markets reacted anyway, as the US has become indispensable to global diesel supply, with the country having lifted its own exports more than 20% this year to about 1.3m barrels a day. Remove that supply and there's nowhere for the rest of the world to turn: global refineries are flat out and US diesel inventories have fallen to their lowest level for this time of year in more than four decades.
An export ban would hit Mexico, Chile and Brazil hardest (more than a quarter of US diesel exports between them) and Europe (another quarter), which is why European diesel prices jumped more than 5%.
Brent crude is back at $105 a barrel, as talks between the US and Iran seem to stall at the UN. Markets are now pricing three Fed rate rises by next April, not the single October hike as thought, a material escalation in a matter of days.
Hawks vs. the holdout
The Bank of England is watching the same thing happen to its own inflation picture. Deputy governor Clare Lombardelli said on Thursday it's "increasingly likely" the UK will need to raise rates if oil stays elevated, warning that the longer energy costs stay high, the more likely they are to feed into wage bargaining and price-setting.
Not every central bank agrees the fire needs putting out. The Swiss National Bank held its rate at 0% on the same day, judging medium-term inflation pressure to have "increased only slightly." Somebody's wrong, and the bond market's verdict, three multi-decade highs in one session, suggests it isn't the hawks.
Context worth keeping in mind: benchmark interest rates have historically sat between 3% and 6% for most of financial history. Today's levels aren't abnormal but a generation raised on near-zero rates has just forgotten what normal looks like.
Not everyone in equities is panicking. Keith Lerner, CIO at Truist, points out that the S&P is only 1-2% off its all-time high, but underneath that headline the picture already looks like a market that's absorbed plenty of pain: barely 30% of S&P constituents are trading above their own 50-day moving average, and Lerner reckons sub-20% would mark a genuine washout. His own read: another 5-8% of downside is plausible from here but he still calls the bull market "intact."
There's a real-world impact here: the US 30-year fixed mortgage rate jumped to 7.26% this week. Higher government borrowing costs don't stay abstract for long and this will undoubtedly impact what has already been a shaky US homes market this year. Suggesting Berkshire Hathaway’s $6.8 billion purchase of homebuilder Taylor Morrison in July and its recent stake increase in Lennar above 10%, could prove to be prescient moves.
Even the geopolitics has stopped helping. Trump hosts Xi in Washington for a summit investors hoped might ease trade tensions. China's stock market fell on scepticism it would deliver, having its worst day in a month, and got a two-month trade-truce extension for its trouble, not the breakthrough that was hoped for.
The question isn't whether inflation is back. It's whether the borrowing costs of three governments breaking multi-decade records on the same day means bond markets have stopped believing central banks can control this at all.
One more thing: Goldman Sachs reportedly earned more than $200m in prime brokerage fees this year from Situational Awareness, making a fund barely two years old Goldman's single highest-fee hedge fund client. Assets ballooned from a few hundred million to over $20bn on a 439% gain, before a roughly 67% collapse in July forced Aschenbrenner to offload $16bn of positions to Citadel. JPMorgan cut off lending after the losses; Goldman, Citigroup and Bank of America didn't. Aschenbrenner has resumed trading tech stocks, saying he'll "fight another day." Grab your popcorn, this one is far from over!
GLA & DYOR.
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