GM. This is Milk Road Macro, the newsletter that watches bonds like your parents watched you at prom, suspiciously and with good reason.
Before we get into today’s newsletter, we have some Big News.
Today we’re officially launching Macro PRO.
Here’s what you’ll get as a Macro PRO member:
- Monthly market updates — deep dives into the trends shaping markets (first one lands this Saturday)
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This is the kind of institutional-grade research hedge funds pay thousands for… but you can unlock it today at retail price.
Now, here’s what we got for you today:
- ✍️ Here’s why you should be watching the bond market
- 🎙️ The Milk Road Macro Show: Milk Road Macro Breakdown Market Panic w/ Kyle Reidhead
- 🍪 Markets await Powell’s Jackson Hole speech Friday
We’ll be digging into this topic even deeper in our first ever Macro PRO Report on Saturday.
If you don’t want to miss it, make sure you upgrade before then.
Prices as of 8:00 AM ET.
HERE’S WHY YOU SHOULD BE WATCHING THE BOND MARKET
It’s looking more and more likely that the Federal Reserve will be restarting its easing cycle soon.
Two rate cuts are currently expected by the market before the end of 2025.
While this is likely good news for risk asset markets - it’s possible the bond market could have other ideas.
The “Bond Vigilantes” emerged back in 2024 - pushing back on the Fed’s rate cuts.
And it’s possible they could return again this year - which could be concerning for risk assets like equities and crypto.
So, why is it important to watch bonds?
What happened in 2024?
And will the “Bond Vigilantes” strike again?
Let’s take a look…
Why is it important to watch bonds?
Bonds have the ability to “spoil the party” for risk asset markets.
If longer-term Treasury yields are surging upwards, they can wreak havoc on risk asset markets.
We have seen over recent years that roughly 4.5% on the 10-year Treasury yield could be a “danger level” for risk assets.
Every time the 10-year yield has been above 4.5% (yellow line) and rising, it has coincided with weakness for the S&P 500.
Bond yields rising also scares the life out of politicians.
James Carville, a political strategist for Bill Clinton in the 1990s, once said:
“I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”
What happened in 2024?
Last year, between September and December, the Fed cut rates (Federal Funds Rate) by 100bps, but the 10-year Treasury yield (and mortgage rates) rose by 100bps.
This is an unusual dynamic - you would expect Treasury yields as a whole to generally fall alongside short-term interest rates.
But the “Bond Vigilantes” understood that the economy wasn’t as weak as Fed officials thought at the time - and they disagreed with the decision to cut rates.
(The term “Bond Vigilante” originated in the early 1980s to describe bond market investors who "discipline" governments and central banks for irresponsible fiscal or monetary policies by selling bonds, which pushes yields higher and borrowing costs up.)
Through the second half of 2024, recession risk was relatively low, and inflation was still well above the Fed’s 2% target.
Cutting rates into this environment was a bit like pouring fuel onto the fire (the fire is the economy).
As the Fed cut rates through the second half of 2024, US CPI (consumer price inflation) rose from 2.4% to 3%.
Bond markets hate inflation. It’s their nemesis.
So longer-term Treasuries were sold-off (yields rising), even though the Fed was cutting short-term rates.
Will the “Bond Vigilantes” strike again?
President Trump is adamant that interest rates must be slashed, largely to “save the Government hundreds of billions of dollars” in debt interest payments.
He thinks that if short-term rates are lowered, longer-term yields will also fall (saving the Government money).
But this might not necessarily happen.
We are currently in a similar situation to the second half of 2024.
Inflation is on the rise, with CPI (consumer prices) moving up, and PPI (producer prices) recently printing a scorching hot 0.9% month-on-month increase.
Getting control of inflation is still a major problem for the Fed.
We can see two-year inflation swaps steadily rising, as the market expects inflation to remain relatively high.
(Two-year inflation swaps are a market-derived expectation of average inflation over the next two years.)
And recession risk is also currently low.
This can be seen through corporate credit spreads, which are incredibly low.
(Corporate credit spreads are the difference between the yield on a corporate bond and the yield on a Government bond of the same maturity.)
In other words, we’re in an environment that could be ripe for a rise in longer-term Treasury yields.
And it’s looking likely that the Fed will restart rate cuts, probably in September.
The Fed’s stance is that the current inflation burst is likely to be “transitory” and driven by tariffs - meaning a “one-off” inflation spike.
But, it’s possible the “Bond Vigilantes” might strike again in the coming months.
A re-run of what we saw in the second half of 2024.
But if it happens again, yields will start from a much higher base - the 10-year yield was at 3.6% in September 2024, now it is at 4.3%.
(Remember the 4.5% “danger level”.)
We can see 10-year yields edging marginally higher in recent weeks, and this has occurred as expectations of a Fed rate cut in September have risen.
It’ll be interesting to watch how longer-term Treasury yields behave if/when the Fed restarts rate cuts.
Surging Treasury yields would “intimidate everybody”, as Carville said – including risk asset markets.
But it’s also important to mention that Treasury yields can trend upwards in a slow, methodical fashion without a significant impact on risk assets.
This can be thought of as an "orderly" bond sell-off.
But it’s when yields are moving up quickly - with high volatility - that they can really spook risk asset markets.
This can be thought of as a "disorderly" bond sell-off.
We can check Treasury volatility by looking at the MOVE index.
The MOVE Index is currently hovering around multi-year lows - which is good news for risk assets.
Yields are still remaining calm, for now.
Wrapping up
Many people are expecting Fed rate cuts to be bullish for risk assets overall - and they likely will be.
President Trump is also hoping that rate cuts can alleviate the Government’s growing debt burden by dragging down longer-term Treasury yields.
But there is a possibility that bonds could ruin the party - if bond investors become concerned about inflation again.
The two things to watch are:
- The 4.5% “danger level” on the 10-year Treasury yield
- The MOVE Index
As long as the 10-year yield stays below 4.5%, and the MOVE Index remains generally low - the party can continue.
…just keep an eye out for those “Bond Vigilantes”.
That’s it for this edition - catch you in the next one!
PS. If you enjoyed today’s newsletter, don’t forget to upgrade to Macro PRO at 25% Off so you’ll get a full update on the current market straight to your inbox on Saturday.
BOND MARKET MOVES, CRYPTO CONSEQUENCES 🎙️
In our latest episode, Kyle Reidhead breaks down the macro puzzle and explains why the bond market could flip the script on rate cut expectations.
Here’s what we covered:
- Why Kyle thinks the current cycle could extend through 2026
- How stablecoins are creating new demand for US Treasuries
- Why the government is likely to cut rates regardless of inflation data
- What needs to happen before alt season returns
It’s a banger of an episode. Don’t miss it 👇
YouTube | Spotify | Apple Podcasts
BITE-SIZED COOKIES FOR THE ROAD 🍪
President Trump called on Federal Reserve Governor Lisa Cook to resign over alleged mortgage fraud. Cook responded by saying “I have no intention of being bullied to step down and I am gathering the accurate information to answer any legitimate questions”.
Investors look ahead to Jackson Hole on Friday, where Jerome Powell will make a highly-anticipated monetary policy speech that could be market-moving. Economist Mohamed El-Erian wrote that the Fed Chair is “walking a tightrope” and faces “significant and complex” challenges.
Tech stocks were sold off this week in a market rotation away from some of this year’s biggest winners amid concerns over the sustainability of the AI boom. This was fueled in part by an MIT report stating 95% of firms are getting no return from AI, and OpenAI CEO Sam Altman saying he believes there’s an AI bubble.
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