The Bond Market Takes Control: $40 Trillion in Debt, Failed Interventions, and Jackson Hole

The bond market took control this week as the 30-year Treasury yield hit highs last reached during the Great Recession. The sell-off—as interest rates go higher, the fair market value of bonds declines—caused the stock market to have its second losing week in a row, which has not happened often this year. However, the fact that it did not cause a larger decline in the stock market was notable.

Nevertheless, with interest rates heading higher, it does cause a real ripple effect for consumers, driving up mortgage rates, auto loan rates, and equity line increases, as well as corporate and treasury rate increases. Our total federal debt hit $40 trillion this week as well, which was no comfort to the bond market. Another contributor to the unease in the bond market is the new Federal Reserve Chairman, Kevin Warsh.

A Failed Treasury Intervention

Recognizing the danger in the bond market, Treasury Secretary Scott Bessent announced a doubling of the buyback of 30-year Treasuries from $2 billion to $4 billion. For one day, interest rates came down quickly. However, this lasted only one day because the larger purchase of Treasuries did not address the underlying economic problems: sticky inflation, slow growth, trade wars, the high price of gasoline and groceries, and the persisting war in Iran with no hint of a resolution.

With this failure to influence rates for more than a single trading session, it cut directly into the credibility of the Treasury department.

Jackson Hole & The Canadian Trade War

This week is the annual Jackson Hole Federal Reserve meeting, presenting another opportunity for Chairman Warsh to course-correct and provide more guidance in regard to his thinking about the economy and the role of the Federal Reserve. Economists are concerned about the fact that inflation has persisted above the Fed's 2% goal for 5 years now, and whether Warsh feels like he has the freedom to truly address inflation based on Trump's insistence that interest rates should be lower.

Now, we also have a trade war with Canada. After the administration announced a deal was close, the deal fell apart. Now we are at war in trade with our northern neighbor. This will raise prices further, assuming the tariffs take effect.

The Great Sector Rotation Continues

The best explanation for the stock market's recent resilience is impressive earnings across the board, although the internal performance is shifting. The performance of the Magnificent 7 this year has trailed the equal-weighted S&P 500.

Value stocks and small-cap stocks are now outperforming the broader S&P 500 because market performance is fundamentally shifting.