The global financial system is running a fever, and in our hypernormal age the authorities have responded not by treating the patient but by declaring war on the thermometer.
Two stories ran side by side this week. One was the climate-controlled version. Softening data, a Fed that’s finished, an AI singularity that makes arithmetic obsolete, and it’s a story fund managers are buying, with equity allocations at their highest since late 2021.
The other was what the bond market, the oil market and Tokyo were screaming about.
Duration, the long end of the bond market, is on fire. The US 30-year hit its highest since 2007, French yields hit levels unseen since 2008, and 30-year gilt yields approached 6%. But breakevens stayed anchored. This isn’t an inflation scare; it’s real yields, the compensation demanded to hold a government’s paper. Not fear of prices; fear of the borrower and how many there are. That’s the bond vigilantes doing the maths on $40 trillion of debt and $1.1 trillion of annual interest.
So Scott Bessent and the US Treasury doubled its long-dated buybacks, and yields fell for about twelve hours before climbing right back.
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The performance proved two things. Fiscal dominance is real (a $4bn tweak moved the world while a split Fed was ignored); however, it fixes nothing.
A “put” needs a printing press or chainsaw to back it up; the Fed bought $120bn a month at peak QE, while Bessent has $4bn and a promise. The critic of “Activist Treasury Issuance” has become its practitioner, and discovered it has a short half-life.
We also cover why the AI chip rout was the discount rate repricing the multiple, not demand cracking (the tech is real; the question is the return); why Japan and the yen carry trade are where the next margin sits; and why gold, now joined by Bitcoin, is the debasement trade waking from hibernation, scoring not inflation but the credibility of the people in charge.
Underneath it all, own the provers and the physical; be wary of duration priced for a discipline nobody will deliver.
The theatre was loud this week. The signal was louder.
Arithmetic remains undefeated.
Everything proceeded normally.
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Thanks
Jeremy
