The Big Bond Bust Keeps Expanding

A growing, shadowy mass is spreading around the world of finance like a fungal infection. France is highlighted in the articles below as being the worst of major economies to be infected, but if you read where France’s bond yields are, you’ll see the US is worse off for the rates it is paying on a vastly larger debt.

The US is only presumed to be safer because of its global currency status, but another article describes how China is chewing its way through that status with increasing velocity.

The US Treasury did just well in an auction of 10YR bonds that brought yields down from an all-time high again to a notch below that. But then look at the actual interest rate on those bonds, and you see why they found ready buyers—through the roof. So, is that an improvement?

What it really means to me is that the Treasury had to offer and pay the highest yield since the year 2000, a quarter of a century ago, in order to attract enough buyers to call it a good auction in terms of number of participants and in terms of dealers being left holding the lowest number of bonds in the 10YR’s history. A higher yield does get you some buyers, and the Treasury set the opening rate offered at auction at the highest in quarter century, so that even when bids brought the yield a little lower, it still stopped at the highest in a quarter century!

At 5.3%, it was almost half a percent higher than last month’s auction, and well above the French 10YR, which just tickled the bottom of 5%, which was close to a quarter-century high for France, too, but not quite. So, who is doing worse? And was 5.3% good? Is an auction with solid participation at a quarter-century high good? I don’t think so. At a high enough yield, you’re going to find buyers. Everything has a price, and the 10YR finally found its. It just had to price back to where things were during the dot-com bust! Now, the question is will it stabilize there?

I think not. I think it just took a rest. War and higher interest will keeping pushing up on those yields. So much war to finance, you know, and so much higher inflation due to the fact that this war attacks oil directly, and that isn’t letting up:

War-torn world covered in oil smoke

Iran bombed another tanker and threw off the idea of even talking with Trump about any kind of nuclear agreement, saying no talks about nuclear terms would happen until he agrees to their consistent terms that they’ve already stated clearly. The same thing they’ve always said.

At the same time, a report came out that the Pentagon is working up new war plans for the president to attack Iran before the midterms. It’s not decided on; but it’s being presented for his decision.

What the administration is looking for is any hope of a quick, incremental victory:

“After months of on-again, off-again fighting, the United States hasn’t struck Iran in several weeks. The stretch of relative tranquility is coinciding with the final phase of the midterm-election campaign, and the assumption has been that President Trump will want to keep it going through November 3 so as not to remind voters of an unpopular war that is dragging Republican candidates down nationwide.

“But that may not be what happens. The White House has asked the Pentagon to develop strike options against Iranian targets that could be exercised ahead of the midterms, according to two administration officials. The planning underscores just how much the president wants to reduce gas prices and demonstrate progress in the conflict before the vote, administration officials told us.”

And yet a renewed outbreak of direct bombing would likely actually serve to do the opposite, given oil prices have tended to shoot up on headlines of major direct escalation.

Reports out of Iran confirmed earlier Wednesday that negotiations are ‘stalemated’ - also as the Iranians have ramped up targeting tankers with drones in the Strait of Hormuz over the last week.

One peculiar and notable line from The Atlantic report is that Trump and the Republicans are looking for “some sort of victory” in a war that they promised would be swift and decisive, but instead has drifted into a seven-month quagmire:

“Even the plans’ advocates acknowledge that limited strikes would not, by themselves, bring Iran to the negotiating table, restore safe travel through the Strait of Hormuz, or lower gas prices before Election Day. But those in favor believe that further action after months of uneasy peace could allow Trump to demonstrate strength and potentially declare some sort of victory, giving Republicans much-needed momentum heading into the election.”

So, new war plans are being drafted for expeditious political reasons. Fighting a war politically with plans that never made long-term gains never worked out well in Vietnam. That kind of short-term planning of wars where presidents call the shots with political considerations helped make Vietnam America’s first great quagmire, not that the earlier Korean War went much better; but, at least, a partial victory was won there.

Wednesay (10/7): A tanker was hit by “multiple projectiles” about 51 nautical miles north of Qatar.

So, don’t bet on those bond rates stabilizing where they found a temporary landing to pause.

This represents a very clear shift in strategy by Iran.

It has been a long time since they struck a commercial vessel in the Persian Gulf outside the Strait of Hormuz, signaling an expansion in the range of their attacks.

The key aspect of this new strategy, however, is the intent to cause casualties rather than merely halt the vessel, indeed, in recent days, instead of targeting only the engine to stop the ship, the IRGC has been focusing on striking the vessel multiple times, specifically to kill crew members….

Iran’s considerations and conditions for ending the war on all fronts and restoring security to the Persian Gulf region and the Strait have been clearly and firmly explained.

When Iran was trying to limit the killing of people by striking just the engine rooms, it left a door open for some sailors and their captains to try to make the big wages that companies were offering crew to attempt passage through the strait. The crew and captain could spin the routette wheels and say, “If they’re only hitting the engine room, we may be safe.” Well, except the engineer, but maybe even he or she would keep the hatch open for a ready escape if the US military radioed that any missiles were on their way. Now Iran targeting the crew makes it much less likely that ships will try to make it through.

So, about those bond rates …

Still, the bounce was short lasting and just like French OATs, the selling resumed promptly after the auction as the bond market - unlike its stock peers - is far less gullible and realizes that while today’s auction was always going to go through, absolutely nothing has changed.

Just a rest on the way up the ladder.

Trumped on fuel prices

And a little word of no surprise here. Trump chose not to ban diesel exports as a way of helping Americans on fuel prices by keeping their own oil onshore. I said earlier it was highly unlike he would take that route because he’s highly invested in oil and loves the high prices oil is getting from foreign sales competing with American sales. He’s making bank on oil due to his war.

Instead, he made the pretext of helping by eliminating the federal tax on diesel for truck divers. That doesn’t help anyone but truck drivers, and doesn’t help them much. It doesn’t help farmers because they already don’t pay that tax. Truck drivers, however, will now get that same benefit by being allowed to run Ag fuel—the dyed stuff—also called off-road fuel—in their trucks.

So, it helps if you’re a truck driver, except that the federal tax only subtracts about 25 cents off the cost of a gallon and except that no states that charge their own fuel tax on diesel have to agree to stop enforcing their own bans on the use of off-road fuel on the road for trucks. So, the trucker still risks getting ticketed by the state patrol in any state if the state chooses to enforce their own rules about off-road fuel.

For Trump, this is a win-win. He didn’t shave anything off the price that his large oil holdings get on their oil, thanks to the war he started, nor shave anything off the high demand for that oil. He just cut what the federal government gets, and that is no skin off his nose; so he still gets to look like the trucker’s friend who is trying to help out.

I apologize for not getting anything out. I was sick all day. Sick today, too, but not as bad. Hopefully, I’ll be fully back on track. In other news below, the AI bubble, according to billionaire investor Ray Dalio is ready to burst now, too, and Treasury Secretary Scott Bessent is getting increasingly frowned upon. Unsurprisingly, American losses in the Iran war have been bigger than let on, and Trump is getting mad that many Republicans don’t want him hanging around their campaigns while Dems now are seen as having a 61% chance of taking control of the Senate and a near certainty of the House. Of course, polls are often wrong. Plus lots of news on the new Russian plague.