In 30 seconds: US Treasury yields surged to near 20-year highs around 4.85% as the Treasury announced a $6 billion long-duration debt buyback program, sparking debate about its market impact, Fed implications, and effect on risk assets and the dollar. A wave of consumer and market data revealed rising debt burdens, growing inability to meet minimum payments, surging commodity price expectations, and weakening equity breadth, even as headline employment and recession indicators remained relatively stable. Analysts, led by Luke Gromen, argue the US faces an inescapable fiscal trap where cutting entitlements or defense triggers recession and higher deficits, leaving massive USD devaluation as the only viable exit from a 120% debt-to-GDP crisis. Brent crude topped $100 per barrel and US diesel exceeded $200 per barrel, reaching the highest levels of the ongoing Hormuz crisis, with futures markets signaling sustained elevated prices as the conflict extends well beyond initial expectations.
10-year Treasury yield: 4.845%. The 30-year Treasury yield climbed 6 basis points to 5.302%. Treasury said it would buy back up to $6 billion in longer-term debt. The arithmetic is interesting. Annualized, the buyback program amounts to roughly $192 billion in long-duration purchases, or about 20.8% of the $924 billion in total gross annual issuance of 10-, 20-, and 30-year nominal bonds. The program will run 8 operations per quarter. The assessment: largely in line with expectations, but the implications cut in several directions. One analyst's read: the buyback makes the Fed's job harder, supports risky assets, is good for gold, and bad for the dollar. If you are the Fed trying to cool the economy while Treasury is effectively easing financial conditions through the back door, you have a coordination problem. There is precedent for supply-side drama in long bonds. Treasury cancelled the 30-year bond on 10/31/2001, and the curve flattened 30bp almost immediately. It then reintroduced the instrument on 8/9/2005 but did not auction it until 2/9/2006. Supply decisions at the long end have always moved markets more than people expect. Gold, for its part, seemed to get the memo. It closed at $4,442.40, up 1.10% on the day. Brent crude topping $100. The Fed meets next Wednesday, 9/16, and the odds of a rate hike have whipsawed, shifting from 60/40 to 40/60 and back to 60/40 over recent weeks.
The headline numbers look fine. The economy is on strong footing and the odds of a recession are very low. A proprietary leading indicator from the same shop accurately said there wouldn't be a recession in 2023 and 2024, even when so many others predicted one, which is the kind of track record that earns you the right to be optimistic. Private payrolls ticked higher by 12,000 on a four-weeks ending Aug. 22 basis, marking 3 consecutive weeks of strengthening. Underneath that, the credit data tells a different story. Outstanding non-revolving credit surged by $15.3 billion, the largest advance in three years. American consumer borrowing (July) $18.1 billion vs Street's high estimate $16 billion. The share of consumers expecting inability to make minimum debt payments over next three months up 2 percentage points latest New York Fed survey. Meanwhile, consumers see costs accelerating. Commodity price growth expectations for year ahead increased across the board in August. Gas price growth expectations for the year ahead leapt to 4.6% from 2.9% in July. That is not a number that makes anyone feel wealthy. Current mortgage rates sit at 6.5-7.0%, well above the 4.33% effective rate on outstanding mortgage debt. Refinancing applications are down just over 30 percent year over year. Difficult to see how a refi cycle gets going, given current mortgage rates remain well above the effective rate on outstanding mortgage debt. Markets seem to agree something is off. The S&P 500 equal-weight index is breaking its 50-day moving average — the first time since April. S&P 500 equal-weight breaking the 50-day MA. Overall breadth continues to weaken, right in line with the early September weakness scenario. Large cap ETFs registered heavy negative outflows in the week ending 9/4/26, while aggregate and government bond ETFs absorbed the largest inflows. The rotation from equities to bonds is not subtle. The economy is on strong footing, until you look at who is standing on it.
The arithmetic of the US fiscal position has a certain elegance, in the way that a trap does. Debt-to-GDP sits at 120%, the deficit runs at 7.4% of GDP, and healthcare and entitlements alone consume 17% of GDP. Start with the obvious move: cut spending. Cut 7-8% of GDP from spending and GDP goes negative — and when that happens, the deficit rises 600 to 1,000 basis points, not shrinks. You tried to fix the hole and made it twice as deep. The entitlement side is no more tractable. So maybe you let the dollar strengthen and attract foreign capital? Also bad. A sharp dollar rally forces liquidation across all of those positions, crashing US markets, the Treasury market, and therefore the tax receipts you needed to service the debt in the first place.
Brent crude topped $100 this morning, and the more interesting number is what happened next: the contract touched $101.58 per barrel before pulling back to around the $100 mark. Futures markets don't believe prices are about to drop, which keeps oil prices elevated. Oil jumped sharply this weekend, and yields are higher this morning. Brent popped above the July high close, clearing the $102 July intraday high. US diesel hit $200 per barrel, the highest print of the Hormuz crisis and the worst since the April 2022 crisis. Through most of this conflict, crude and crack spreads have generally moved together, meaning crude and refined products have risen in tandem. But crude and diesel are fundamentally different commodities — you could easily imagine a world with $60 crude and $100 diesel cracks. Diesel: $200 per barrel.
Here is what your portfolio did this session.
S&P 500: 7,636.36, down 0.48% on the day
10-Year Treasury yield: 4.84%, up 3 bp on the day
30-Year Treasury yield: 5.29%, up 2 bp on the day
13-Week T-Bill yield: 3.80%, up 3 bp on the day
Gold: $4,442.40, up 1.10% on the day
Fed funds rate: 3.75%, flat 0.00% on the day
Long bonds (TLT): $81.73, down 0.57% on the day