The Bond Market is the House

The bond market has taken control from Warsh and Bessent, and in some ways is now testing or even tormenting them.

Yields are higher; they want them lower.

The curve is showing excellent tactics. Markets have already warned that, if Warsh doesn’t hike, the long end could go sharply higher. And Bessent was worried enough to intervene –  with no upper limits! The benefit of this announcement didn’t last long.  

Following the Federal Open Market Committee (FOMC) corrections to its July messaging and a firm commitment to a 2% PCE target at a very hawkish Jackson Hole, the curve agreed, took encouragement, and flattened. Now inflation and growth are making the case for a hike. If he doesn’t? We go higher and steeper in treasuries.

Warsh and Bessent might well end up being right that the economy’s nominal GDP could slow gradually from here. But in this market moment they do not have the luxury of time to wait and find out.

The bond market is in charge. Bring inflation down and yields will rally. Curb government spending and yields will fall and curve might flatten. The bond market knows what it wants and currently seems to be in charge. Also, this is all coming just at the moment when everyone seemed to have forgotten about Iran. That might turn out to be a massive deal as it’s pushed inflation up and, with it, rates. So, the bond market might have trumped Trump somewhat too? Right now, it feels like the bond market is ‘The House’, more so than Warsh, Bessent and Trump.