Investment-grade CDS (Credit default swap) prices traded below 50 bps Friday, to within a few basis points of lows since February 2020 (44 bps pre-Covid – lowest back to pre-GFC). At 301 bps, high yield CDS is not far from lows back to 2021. The VIX traded below 14 in Friday trading for the first time since December, ending the week just off two-year lows. JPMorgan CDS closed the week at a one-year low of 37.268 (5-yr low 36.5).

I don’t recall a period when financial conditions indicators and risk premiums were so generally detached from underlying market, financial, economic and geopolitical risks.

Talk now is of triple “puts” – the “Trump,” “Bessent,” and “Fed Puts.” “Bessent Put vs. Fed Independence: Two Forces Fighting Over Treasury Yields.” “Investors Skeptical on Bessent Put, Morgan Stanley’s Sheets Says.”

Skepticism may be apparent in government bond markets, while equities, corporate Credit and CDS seem rather comfortable. At least for now, risk markets trade as if “the fix is in” until the midterms. Significant developments and mounting stress are disregarded. UK debt crisis – been there, done that.

Reminiscent of 2022 gilt deleveraging, UK yields surged to 5.29% in Wednesday trading – at that point up a notable 23 bps in three sessions (closed the day at 5.23%). The spike pushed 10-year yields to the highest level since July 2007 – and within 26 bps of the high back to February 2000. Meanwhile, 30-year yields jumped to a 28-year (March 1998) high of 5.91%.

“Burnham Risks Truss Moment, Warn Bond Traders.” “City Warns Burnham of Borrowing Shock Unless He Slashes Spending.” “This Bond Market Crisis Means Burnham May Need to Cut, Not Spend.” “Andy Burnham Can’t Beat the Bond Market.” “Andy Burnham Tries to Calm Bond Markets as Public Spending Fears Mount.” “Warnings of Interest Rate Rises as PM Seeks to Calm Markets.” “‘City Warns Burnham’ and ‘One in the Eye.’”

Gilts are not an only problem child. French 10-year yields traded up to 4.28% Wednesday – the high since October 2008. This compares to a 3.78% high during the 2011 European debt crisis. Thirty-year French yields surpassed 5.00% for the first time since pre-crisis 2008. German yields traded to 3.40% Wednesday – the high since August 2011 (vs. 3.49% European debt crisis high). Italian yields rose to 4.24% and Greek yields to 4.09% – both three-year highs.

Elsewhere, Australian yields touched 5.25% Tuesday (closed week at 5.17%) – the high back to July 2011. New Zealand yields jumped to 4.84% – not far from a three-year high. South Korean yields traded up to 4.42%, near the high since the 2022 gilt crisis spike.

There is little of the 2022 global instability that accompanied gilt deleveraging. For example, investment-grade CDS (50 Friday close) surged from 74 on August 12th, 2022, to 114 bps intraday on September 30th. High yield CDS (301 Friday close) jumped from 420 (August 19th ’22), to an intraday high of 640 bps (September 30th). European Bank (subordinated) CDS (86 Friday close) traded from 179 on August 19th to 289 bps on September 30th. EM CDS (137 Friday close) traded at 331 bps on September 30th, 2022. Indicative of U.S. bank CDS generally, Bank of America CDS (53 Friday close) traded as high as 119 bps on September 30, 2022.

It’s worth noting that Treasury yields spiked from 2.83% on August 5th to a high of 4.22% on October 21st, 2022. There was a “doom loop” fear of spiking yields, deleveraging, and forced Treasury sales by EM central bankers to bolster their faltering currencies. Importantly, this dynamic has not been a recent issue. If anything, global “carry trade” leveraging remains as hot as ever. But there are cracks.

September 4 – Bloomberg (David Finnerty and Ruth Carson): “A rush to unwind yen-funded carry trades helped send the currency to a one-month high against the dollar as traders ramped up bets on further Bank of Japan interest-rate hikes… ‘We’re seeing unwinds of yen-funded carry trades and significant interest to own the yen over other G10 currencies in the medium term,’ said Sagar Sambrani, a senior foreign-exchange options trader at Nomura… ‘The broad consensus seems to be that the easy carry trade is behind us and that the size of cross-border flows from Japan to the US could have changed materially.’”

September 3 – Bloomberg (John Cheng): “A further unwind of sizable short positions could accelerate the yen’s gains if it strengthens past 155 per dollar, according to JPMorgan… strategists. ‘Recent price action appears to corroborate our view that a relatively large JPY short position may still be outstanding,’ strategists including Junya Tanase wrote… If dollar-yen breaks below 155, ‘the risk cannot be ruled out that selling could beget further selling and drive a larger-than-expected yen appreciation.’ JPMorgan estimates ¥16 trillion ($102.6bn) to ¥17 trillion of bearish yen positions remain outstanding and says a complete unwind could theoretically push dollar-yen into a 142-146 range.”

During the gilt deleveraging period, Mexico yields spiked from 4.68% (August 12th) to 6.73% (October 20th), with Brazil’s yields jumping from 5.52% to 6.83%; Indonesia (local) 6.94% to 7.60%; Hungary 7.40% to 10.66%; and Poland’s 5.45% to 8.69%. Mexico peso yields surged from 8.40% to 9.93%. EM yields have been rising, but it has remained orderly.

White House reporter (Friday, September 4): “… A rate hike could reassure the bond market…”

President Trump: “To me, it doesn’t reassure the bond market. To me, you do a rate cut, because we should be at one percent or a half a percent. We should not be at 4%. As I’ve explained, we could do tremendous good for ourselves by just not trading with countries. We lose with the European Union $200 billion a year. If I didn’t trade with them, we’d lose nothing. Just one swipe of the pen. We lose with Mexico $195 billion a year. If I don’t trade with Mexico – they have nothing that we have to have. I mean, hot tamales, tomatoes, a couple of things. But basically, they have nothing that we need. We have oil, we have everything. I don’t want to do that because we get along very well with the president – we like the president and respect her a lot… If we didn’t want to trade with Canada – we would save from $60 to $90 billion a year, by just not trading with Canada. Now Canada would be in a heap of trouble. I don’t think they would exist. Because, again, they do 95% of their business with us. So, if I say we’re not going to trade, that means 95% if their business gets wiped out. I don’t know what they would do. So, we should have the lowest interest rate, as we used to 25 or 30 years ago when we were smart.”

The Fed policy rates began 2001 at 6.50%, before the Fed responded to a bursting tech Bubble with 475 bps of cuts over the following year. As for 30 years ago, the Fed raised rates 300 bps over 12 months beginning in 1994, and held rates at 6.00% until July 1995. Rates were at 5.25% in September 1996. For comparison, the ECB policy rate was 3.0% in September 1996.

“We have countries that are considered elite financially, like Switzerland, like others. But if we didn’t trade with them, they would be bankrupt countries. They’re considered elite because we have massive deficits with them. We have the right not to trade. We have the right to put tariffs on them.”

“We should have the LOWEST RATE of any country in the World, like ‘the old days.’ Without the United States agreeing to allow them their big surpluses, and we could stop that immediately, they would no longer be considered financially ELITE! LOWER THE RATE OR I’LL STOP TRADING WITH COUNTRIES WITH WHICH WE HAVE A DEFICIT, which the U.S. Supreme Court, in its ridiculous and very costly Tariff decision, strongly acknowledged ‘the President’ has an absolute right to do. ITS BETTER THAN TARIFFS! The Fed Board, with its great new leader, must get smart – BE PATRIOTS for a change. High interest rates put the U.S.A. at a very unfair disadvantage, and I won’t allow that to happen! President DONALD J. TRUMP.”

“How crazy is this? We just got GREAT Numbers on Jobs, the Market should go UP, because our Credit and Economy are better but, as always, for the past 25 years, the Stock Market goes DOWN, because we’re living under False Reality that if things are good, you’ve got to ‘KILL IT’ because of a ‘fear’ of Inflation. It should be the opposite, and always was until 25 years ago. If we stay with this Theory, we will never be able to have the True Economic Greatness for our Country that it deserves, because every time we do well, the stupid people want to immediately stop this Great Upward Momentum. GROWTH DOES NOT CAUSE INFLATION! I knew this morning as soon as I looked at these fantastic Job Numbers that the Market would go down when it should be going UP like a Rocketship. We should be doing GDP of 15 and 20%, not 2, 3, and 4%, and America should become Far Greater Financially than it is right now. Our Debt would be paid off, and all of these other things would happen. Remember, every point in the Interest Rate costs the U.S. 650 Billion Dollars a year. We should pay the Lowest Interest Rates in the World because we make everything run, and give otherwise failed countries Great Economic Wealth! Thank you for your attention to this matter. President DONALD J. TRUMP.”

I’ve highlighted the President’s Friday comments and two Truth Social posts. There was also Thursday’s “We believe that the Fed should be lowering interest rates” pressure from the vice president. The Trump administration, certainly including Secretary Bessent, is playing with fire.

September 4 – Reuters (Iain Withers and Tommy Reggiori Wilkes): “The manager of Norway’s $2.3 trillion sovereign wealth fund has proposed significantly cutting its exposure to U.S. Treasuries as part of ‌a wider shake-up of its bond investments to improve returns, according to a letter published this week. Norges Bank Investment Management has recommended reducing its weighting to government bonds within its benchmark bond index to 50% from 70%, with U.S. Treasuries, the biggest holding, getting the biggest cut, according to the letter. The changes would mean cutting nearly $80 billion from the fund’s current holdings of about $215 billion of U.S. Treasuries as of the end of June, according to Reuters calculations.”

September 2 – Bloomberg (Patrick Van Oosterom and Jack Ryan): “The Dutch Central Bank has shifted gold reserves worth about $12 billion from New York and Ottawa to London, citing concerns about increasing global geopolitical unrest… ‘With this relocation, we have improved the tradability of our gold reserves,’ Dutch Central Bank Governor Olaf Sleijpen said… ‘We expect that we will never need to use them, but we do need to strengthen our resilience and preparedness.’”

At this point, Washington is making the short-timer Liz Truss government appear the epitome of fiscal responsibility. And this is certainly not the market environment for the President to spew utter nonsense. Our President has a dangerous obsession of wielding the tariff threat, including against our Canadian friends and other allies. But to threaten the Fed with the consequences of tariffs and trade wars if they don’t slash rates is both ludicrous and reckless.

The rates market dropped the probability of a September rate hike from 65% to 50% on dovish comments from Fed governor Waller:

September 3 – CNBC (Jeff Cox): “In remarks that seem to contrast with statements last week from Chairman Kevin Warsh, Waller expressed confidence in the current inflation trends, saying that tariff impacts likely have been muted and higher energy prices haven’t had a substantial impact on other parts of the economy. While he conceded that inflation is ‘meaningfully above’ the Fed’s 2% target, he noted that recent trends ‘suggest we are finally seeing some signs of disinflation.’ ‘If this continues in the data due over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting… I’m going to paraphrase John Lennon here: Give disinflation a chance. We can wait one meeting. What’s the cost of waiting one meeting? Hiking 25 bps, one meeting right now, is not going to bring the CPI down to 2%.’”

Five years of inflation above target. Why not six or seven? Heck, the stock market has performed spectacularly with elevated inflation. Economic growth has remained solid. But signs of disinflation?

Thursday’s ISM Services report had the Prices Paid component at a stronger-than-expected 72.6 – a three-year high. Tuesday’s ISM Manufacturing Prices Paid was a stronger-than-expected 71.1.

September 4 – Bloomberg (Eleanor Thornber): “Global food prices rose in August to the highest since the end of 2022… The United Nations’ index of food-commodity prices climbed 1.9% from July, led by grains, sugar and dairy, according to a report from the Food and Agriculture Organization… The FAO index tracks internationally traded food commodities, meaning it can take time for price changes to reach supermarket shelves. All the staples tracked in the index rose in August, led by an 11.9% jump in sugar and a 2.6% gain in wheat, which stands 15% above its year-earlier level. The Bloomberg Agriculture Spot Index, which tracks 10 major products, rose more than 13% in August, its steepest gain since July 2012. Wheat and corn futures have climbed to multi-year highs.”

WTI crude prices surged $8.08 (9.7%) this week to $91.48 – with gasoline futures up another 5.4%. Diesel prices surged to a record $5.85 a gallon this week, up 67% y-t-d. There will be FOMC officials skeptical of imminent disinflation at the September 16th meeting.

September 4 – Bloomberg (Catarina Saraiva): “Federal Reserve Bank of Cleveland President Beth Hammack said it’s time for the US central bank to act to cool inflation. ‘Right now, what I’m hearing is that it’s time to act,’ Hammack said Friday in a LinkedIn post. Hammack, one of three policymakers to dissent from the Fed’s decision to hold interest rates steady in July, said both data and anecdotes from her district are telling her that monetary policy is not sufficiently weighing on the economy right now. In her post she described a conversation with a manufacturer in Northeast Ohio who told her the Fed should raise interest rates because he’s seeing double-digit inflation in many of his input prices.”

With a 4.1% unemployment rate and much stronger-than-expected August job growth (162k vs. 55k), even favorable CPI and PPI data next week should not preclude a rate increase on the 16th. If the Fed holds, Warsh’s inflation tough talk shtick will ring hollow.

Ten-year Treasury yields rose another six bps this week to 4.78%, with Wednesday 4.82% intraday yield the high since October 2023 – and within 11 bps of October ‘23’s multiyear high (back to November 2007). It’s worth noting that the shallow yield pullback on Waller lasted only minutes.

This took years longer than expected, but has the Treasury market finally reached the point where it begins to demand tighter monetary policy? At the minimum, Federal Reserve officials will now at least have to contemplate a negative bond market reaction to dovish policy.

Meanwhile, President Trump and his administration are on a collision course with the bond market. And, sure, Bessent can issue more T-bills to repurchase longer duration Treasuries. Fannie and Freddie might up their purchases of longer-dated MBS and bonds. Better yet, the administration could employ some coercion and pressure to keep things going. The hedge funds could always boost “basis trade” leverage. It would not be surprising to see the administration press the banks to further inflate Treasury holdings. Similarly, the big Wall Street firms might be directed to lever more Treasury securities.

They’re on a perilous path. And my analysis is not political. This is about a rapidly deteriorating global bond market environment, with a U.S. President/administration champing at the bit to overstep every boundary, to disregard all constraints, and to defy every limit. Unhinged Friday got us one full step closer to a crisis of confidence.

It’s fascinating. Most financial conditions indicators point to confidence that the fix is in through the midterms. A new degree of complacency. And with elections now only two months away, markets can begin to ponder the post-midterm landscape. I suspect we are these days witnessing the President and administration’s best behavior. Risks are rising that he goes completely off the rails.

I’m reminded of James Carvill’s famous quote from the early nineties. “…I want to come back as the bond market. You can intimidate everybody.” The President scoffs, believing he’s the king of intimidation, the untouchable bully for the ages. “Andy Burnham Can’t Beat the Bond Market.” Bet on Donald Trump? Well, expect the bond market to force a reckoning – and quite a reckoning indeed. An incredulous world is watching.

September 4 – Bloomberg (Tom Rees): “Central banks face a ‘serious challenge’ from the rise of populist forces, Bank of England Governor Andrew Bailey warned… Bailey said the UK central bank must not take its ‘legitimacy for granted’ and ‘demonstrate how our actions serve the public good’… ‘Any institution seen to get in the way becomes an unrepresentative elite standing between the people and their will, and thus an obstacle to popular sovereignty,’ Bailey said… ‘This is a serious challenge. We have developed systems of government (in the broadest sense of this term) in which legitimacy rests in the plurality of society, not in the preferences of any single group within it.’”

September 3 – Bloomberg (Tom Rees): “The biggest threat to central banks’ independence comes from governments pushing them to finance huge fiscal deficits, according to the Bank of England’s chief economist. Huw Pill… said… that how central banks tackle such risks is the ‘defining challenge they currently face.’ Slow growth and a series of supply shocks have led to bigger deficits and higher levels of public debt globally, Pill said… Financing those deficits through central banks could bring into question their independence, he warned… ‘Were governments in any country to seek financing from the central bank to cover their deficits, this could bring into question the independence of central banks – something essential to the credibility of monetary policymakers’ pursuit of price stability,’ he said. ‘How central banks meet such threats to independence in an uncertain and difficult economic environment is the defining challenge they currently face.’”

Original Post 4 September 2026

Categories: Perspectives