License to yield

So Mike, US Treasury saw their biggest selloff yesterday since President Trump's Liberation Day tariff announcement last April.

Overnight, they got to 5.13%, I think, on the 10-year.

The immediate trigger seems to have been PMI data yesterday, which showed business activity in the US at a five-year high.

So does the bond market think the US economy is overheating?

I mean, it's a really good question, but it was a real bolt from the blue yesterday, and it wasn't just in US Treasuries.

It was across all government bond markets as we've seen repeatedly through this year.

You know, the, a lot of investors, and we'd been writing about this, were, were beginning to consider whether it was time to dip their toes back in the bond market, that the worst of this kind of brutal selloff this year may have been over, and that with coupons and interest rates so, that high, maybe it was time to kind of, uh, grab some of those.

But the answer to that question is not yet, because that selloff was dramatic yesterday.

So we have to go through a whole series of issues as to what's happening, 'cause it wasn't just one thing.

So, so as you mentioned, the early September business surveys, both in the United States and in Europe it has to be said, were the highest in years.

Five-year high, or fastest pace in five-year, five years in the US, and the fastest pace in, uh, three years in Europe, alongside really racing input price growth as well as you can imagine from the energy squeeze that's happening.

Um, the, that combined with, uh, a, a, a speech from Michael Barr.

Now, Michael Barr, uh, is a Fed board member.

He's often been seen as a centrist within the council, so r- not, neither a hawk nor a dove.

But Barr made it very clear the Fed probably needed to raise interest rates, uh, uh, a lot more, and, and probably a lot more, uh, to get across, uh, inflation.

And that's, uh, I think also, uh, fed into interest rate market pricing.

So we now have a situation where the futures market and the money markets are seeing a two-thirds chance that the Fed will raise rates, uh, as soon as next month again, and the ECB also in October, a two-thirds chance that it will move again as well.

So that's a lot of tightening coming through very quickly.

And if you look further out the horizon, uh, there's now a h- almost 100 basis points of additional Fed hikes over the next year.

So this is really what the bond market is feeding off.

But there were other things.

As we talked about yesterday, there was some hope that the UN meeting would see possibly a breakthrough between the US and Iranian sides.

Now, those meetings happened, at least mediated meetings happened, but there appeared to be no sign of a breakthrough yesterday, and certainly, uh, the Iranian president's speech was pretty uncompromising, y- you have to say.

And then in the backdrop, you had these U- US, uh, diesel export, uh, plans, uh, to, plans to, to ban, uh, diesel exports because of what's happening and possible shortages in the United States.

That feeds around as well, 'cause diesel prices in the rest of the world of course, uh, rise as a result.