Analyzing the US Labor Market and Fed's Rate Cut Dilemma - Episode 4

The US Treasury is buying back $4 to 6 billion of long dated bonds at a time, against $5.4 trillion outstanding and $900 billion of new issuance every year. Jonny calls it a pea shooter pointed at a battleship. Bonds made last week’s front cover of The Economist, a cover with a record of marking turns. When everyone is suddenly worried about the long end, where does it go next?

France's deficit is heading for 5.4% this year, the government's plan to cut it to 5% is unlikely to survive the National Assembly, and a presidential election lands in April. French yields keep climbing, the two year Bund now yields 175 basis points less than Treasuries, and the VIX hasn't moved. The Nasdaq hit an all time high on Friday.

The 30 year Treasury yield traded above 5.5% this morning. The 10 year is now clean through 5%, a level that held as a ceiling for two years. Whatever was capping yields broke last week, and Jonny doesn't think it's coming back.

The Fed hiked 25 basis points last week, and the market's answer was to rally. The S&P is up 3.5% since the meeting, the Nasdaq 4.5%. Retail sales control group spending jumped 1.4% in August against a forecast for half a percent. Whatever that hike was meant to do, it isn't slowing anything down yet.

Oil is up roughly 12% over the past week, hitting a US economy already at full capacity, 4.1% unemployment and payrolls averaging 106,000 a month. That's the kind of shock that turns into services and core inflation rather than fading on its own. Fed funds futures already price an 87% chance of a hike this week. The real question is what happens to the other 75 basis points still priced in after that. The other supposed backstop already cracked. Bessent had promised to at least double the Treasury's bond buybacks, with the street expecting 5 to 7.5 billion. The first operation only spent 3.6 billion against 10.5 billion of bonds dealers offered, because Bessent wouldn't pay up for the rest. The 30 year yield broke through 5% anyway, and the 10 year touched a level it hasn't held since 2007. Jonny sits down with Andy Constan, founder and chief investment officer of Damped Spring Advisors and his former boss at Salomon Brothers, to unpack why the sell-off has further to run, why Treasury's own supply games matter more than talk of QE, and why he thinks the real fault line is the private credit funding the AI buildout, not the bond market. In this episode: Oil up around 12% last week, landing on an economy at 4.1% unemployment and 106,000 average monthly job growth Treasury's buyback boost landing at 3.6 billion spent against 10.5 billion of bonds on offer The 30 year yield through 5% for the first time in years, the 10 year testing a level not held since 2007 An 87% priced chance of a hike this week, and what happens to the other 75 basis points priced in after that Term premium on the 10 year at 90 basis points, up from minus 50 in the 2020 bubble Why long dated TIPS look like the better trade than nominal Treasuries right now Every major bond deal funding the AI buildout, an 80 billion Google raise included, still trading underwater Jonny has spent 25 years trading macro at the highest institutional level. This is not retail speculation or headline chasing. It is rigorous, independent analysis from someone who has sat at the table. New to SuperMacro? Get 30 days of our Daily Note entirely free at www.super-macro.com 0:00 Intro: this week's G7 bond sell-off and rate repricing 0:58 No Elvis this week, and introducing guest Andy Constan 1:55 The three forces behind the sell-off: fiscal, inflation, and hyperscaler issuance 4:46 Oil up 12%, landing on an economy already at full capacity 6:18 The CPI print, and why PCE inflation isn't getting to target this year 7:24 Treasury's underwhelming buyback announcement 9:11 Inside the first buyback operation: 10.5 billion offered, 3.6 billion spent 10:32 The ECB's hawkish meeting, and why the Fed can't afford to lag behind 11:58 The 10 year touching 5% for the first time since 2007 12:23 The 30 year through its cap, and how high it could still go 13:58 How much hiking is priced into the UK, eurozone and US 16:13 Why current yields aren't as extreme as they look against nominal GDP growth 19:04 Andy Constan: why the Fed has boxed itself into a corner 23:24 How much of the global hiking cycle is already priced in 25:14 Why the dot plot probably won't match what's priced into the curve 27:25 What actually moves the long end: growth and inflation expectations, not supply 28:20 Term premium then and now, and the case for long dated TIPS 30:23 Treasury's buybacks, the November refunding deadline, and Bessent's Yellen U-turn 37:06 The hedge: foreign stocks, gold, and a short dollar 38:10 Why equity valuations hinge on earnings expectations that may not hold 42:51 Every major AI-linked bond deal still trading underwater