There’s only one thing sicker than an Irish parrot outfit this morning. That’s the global bond market. The biggest bully of them all is sick of the nonsense. Not just the front-running of the US President’s social media posts. The Financial Times rightly flagged this week the gob-smacking scale of corruption and ‘insider’ trading going on close to the Oval Office but, in real financial terms, the pricing reactions of equity and oil markets to Trump’s Monday TACO were relatively muted. Of course, oil prices dipped below $100 earlier in the week but they’re back above $110 now. Similarly, the S&P 500 spiked for a day but it too is back slightly below Monday levels. Arguably, Trump’s words have been losing credibility since his first TACO retreat on tariffs in April last year but there’s a much more dangerous aspect to this credibility failure now. Truth has officially fled the higher echelons of US institutions and that impacts the biggest contracts of them all, United States Treasury bonds’ (or IOUs) credit worthiness with the rest of the world. Here are the headlines you’re not reading…
- The yield on the US 10-year Treasury bond has deteriorated/risen by 13.5% (in yield or cost of money terms) since the Iran war began.
- The yield on the US 20-year Treasury bond has deteriorated/risen by 11% in the same period (25 days!!).
- The yields on US Treasuries are used to price almost everything so the average cost of a mortgage in the US is now at a 7 month high despite job creation being at a multi-year low.
- It’s not just the cost of US assets. The global disruption caused by the Iran ‘operation’ has driven Japanese government bond yields up by 16%.
- UK bond yields above 5% are the highest seen in 20 years.
The price moves above are the ones that really count. And their message is very clear: the damage done to energy infrastructure and global supply chains is inflationary. The bond traders don’t believe a word of what is coming out of the White House and Pentagon propaganda machines. The opening up of the Strait of Hormuz is dependent on Iranian cooperation and the ability of logistics companies to commit their ships and crews to a safer and insurable environment. At current levels of reduced shipping activity, the world is losing 11 million barrels of oil every day, as well as numerous other critical distillates like ammonia, diesel, helium, urea etc. The key point is that bond markets do not “price” temporary cost spikes or supply squeezes. The bond market is explicitly contradicting the Trump regime and suggesting longer-term disruption. In fact, the French government have laid out the following observations:
- 30-40% of Gulf oil refining capacity is destroyed.
- That is the worst energy infrastructure destruction since WW2.
- Full repairs could take 3 years.
Thanks Donald. Actually, you don’t need to thank him. Speaker of the House of Representatives, Mike Johnson, went full North Korea at this week’s National Republican Congressional Committee fundraiser by presenting Trump with a new award. The Guardian reports:
“The president has done so much for the American people and we want to honour him, in some small way, some token of our appreciation for his leadership,” said Mike Johnson, the US House speaker. “So, tonight, we have created a new award.” Johnson then introduced the “America First” award, made up of a golden eagle statue. “We could think of no better title for what that is,” said Johnson. “That’s this beautiful golden statue here – appropriate for the new golden era in America.”
Idolatry and empty words. Asia might have other words right now. Latest headlines suggest crisis:
Pakistan is reducing government working hours to save energy
India is diverting gas from factories to homes
Philippines declares a national emergency
Japan to temporarily lift coal power plant curbs over Hormuz crisis
Clearly, bond markets are looking East and not West for the true story. Indeed, it was striking how most commentators and traders earlier in the week were looking to Tehran to verify whether the US President was telling the truth about ‘negotiations’. Yes, an autocratic theocracy is now more credible than the leader of the ‘free world’.
It’s a very strange world, but I suspect the bond market will have a very big say about how events unfold in the Middle East from here.
