Anatomy of a Bond Market Selloff
Let’s break down what’s happening with bonds and how things unfolded Wednesday. Plus, two items from the ‘What the Heck’ department.
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We don’t need no education
We don’t need no thought control
No dark sarcasm in the classroom
Teachers, leave them kids alone Hey, teacher, leave us kids alone
All in all, you’re just another brick in the wall
All in all, you’re just another brick in the wall
– “Another Brick in the Wall, Part 2” George Roger Waters (Pink Floyd) 1979
Anatomy of a Bond Market Selloff, Part 1
One hit after another.
The bond market could not get off of the mat Wednesday. One item after another hit the market and U.S. Treasury debt securities took the brunt of it all. Before one knew it, the U.S. 10-Year Note paid as much as 5.1% (up 15 basis points) and the U.S. 2-Year Note yielded 4.89% (+14 bps). Those two yields stand at 5.14% and 4.91% as I work my way through the zero-dark hours of Thursday morning.
So, what happened? A lot happened. Let’s go back 24 hours and dissect what was a rough day for bonds that spread across all U.S financial markets.
One first has to understand that U.S. Treasuries have been softening up for months and that Treasury Secretary Scott Bessent has been to little effect, trying to contain that softness. It was about this time Wednesday morning that crude oil prices, which had collapsed last week in hopes of renewed peace efforts between the U.S. and Iran, started rising again. That came in response to comments made by Iranian President Masoud Pezeshkian that his country would not fully reopen the Strait of Hormuz as long as the U.S. naval blockade remains in place and as long as U.S. sanctions remain in effect.
A short while later, S&P Global released their monthly Manufacturing and Service Sector PMIs for September. Both surveys showed an economy growing quite robustly. According to those surveys. employment has moved back toward growth and business activity is moving at the quickest pace in more than five years. While that’s good for the U.S. economy at the headline level, it, counterintuitively, is not good for markets that hang on every inflation-connected datapoint.
Don’t go away. There’s more…
Anatomy of a Bond Market Selloff, Part 2
Twenty minutes after the release of those Flash PMIs, Fed Governor Michael Barr participated in a discussion at the Federal Reserve Bank of Chicago. Barr was quite hawkish.
He said, “The FOMC took important action to that end (slowing inflation) last week by increasing the policy rate, which I supported. In my view, given changes to the economy, we were out of position, and we made an adjustment in the right direction.”
Then Barr lowered the boom… “In my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion. We want to support sustainable, durable growth in support of maximum employment, and price stability is crucial to that.”
I’m not done. You wish I was. I am not.
Next, the Treasury Department announced that it would repurchase another $6 billion in Treasury securities later today. That did nothing to slow the bond rout as traders were hoping that this number would be at least $8 billion. Some had whispered $10 billion.
Last but not least, the same Treasury Department auctioned off $70 billion worth of new 5-Year Notes at 1 p.m. ET on Wednesday. To say that this action went poorly would not do justice to how weak the auction was.
For that auction, the high yield awarded was 5.033%, the first time this specific series priced an auction above 5% since 2007. Worse yet, with the “when issued” trading at 5.001% at the time, the auction tailed real-time markets by an incredible 3.1 basis points. This was the second worst tail in the recorded history of U.S. 5-Year Note auctions. Bid to cover was just 2.212, the second lowest since 2018. Meanwhile, Indirect Bidders (foreign accounts) took down just 54.3% of the auction, which is their smallest slice of this pie since March of 2020. Dealers were stuck with 15.8% of this issuance, which was the most since May of 2024 as Direct Bidders took down a larger than usual slice of the pie, albeit, at a price.
Ladies and gentlemen, that is how one takes apart a bond market selloff that likely damaged almost everyone. I know that my bond portfolio, which is sizable relative to the Sarge-folio, was down roughly 0.5% Wednesday. That portfolio has had a good year, all things considered, but yesterday was ugly.
Marketplace
As Treasury yields spiked, U.S. equities fell in price alongside their fixed-income counterparts. The S&P 500 gave back 0.75% as the Nasdaq Composite, which had been very strong of late, surrendered 1.13%. Small-caps and banks were absolutely roasted again. The Russell 2000 gave back 1.77% while the KBW Banks lost 1.19%. As a matter of fact, there was no, save for the VIX, any green on my screen at the index level. Even the Dow Utilities sold off hard as traders sold bond proxies alongside bonds themselves.
Ten of the 11 S&P sector SPDR ETFs closed out the Wednesday session in the red, with only Energy (XLE) in the green, not unexpectedly. There was no safety to be found in the defensives as due to higher rates/yields, traders fled both the Utilities (XLU) and the REITs (XLRE). Even Technology (XLK), this week’s darling sector, closed in the red, as profit-takers hit the semis. The Philadelphia Semiconductor Index gave back 1.23% as SanDisk (SNDK) and Broadcom (AVGO) led the exodus.
Losers beat winners by a roughly 4-to-1 margin at the NYSE and by about 3 to 1 at the Nasdaq. Advancing volume took a paltry 24.1% share of composite NYSE-listed activity and a 35% share of composite Nasdaq-listed trade. The only saving grace might have been the lower trading volume. Aggregate trade was down 9% on a day-over-day basis across Nasdaq listings and down 3.3% across NYSE listings. Wednesday was also the lightest trading day across the membership of the S&P 500 since early last week.
It does, however, appear, as the coyotes and the bobcats hunt my backyard, that this selloff will carry into Thursday morning. Yes, the Trump-Xi Summit is set for today, but I don’t know how much headlines created by this meeting will impact markets ahead of the closing bell.
There will be a state dinner tonight and there are events scheduled between now and then. I would expect some kind words and pleasantness, but news that impacts markets? I just don’t know.
What the Heck? Part 1
As the presidents of the two largest economies prepare to meet in DC, news broke on Wednesday afternoon that the Chinese government had taken possession of sensitive F-35 fighter aircraft parts that were being sent to the U.S. from Australia. Back in May, United Parcel Service (UPS) was tasked with shipping an F-35 cockpit canopy and an F-35 weapons-bay door to Lockheed Martin (LMT) in the U.S. for inspection and possible repair.
Both parts were coated with radar-absorbing material that contributes to the F-35’s stealth capabilities. The aircraft stopped in South Korea and was routed to Hong Kong, where it was intercepted by Chinese authorities. It is not clear why the aircraft stopped in South Korea or was routed to Hong Kong. Beijing has not yet returned the parts.
What the Heck? Part 2
On Wednesday, Australian Prime Minister Anthony Albanese, speaking in New York City, revealed that back in June, an OpenAI agent hacked into an Australian government health services website. The agent apparently “accessed both public and non-public files.”
The Prime Minister explained, “Evidence currently available is there is no broader compromise to the Services Australia network. Nonetheless, this situation is obviously unacceptable.” Albanese added that “no personal information is believed to have been accessed.”
Economics (All Times Eastern)
08:30 – Initial Jobless Claims (Weekly): Expecting 202K, Last 196K.
08:30 – Continuing Claims (Weekly): Last 1.73M.
10:00 – New Home Sales (Aug): Expecting 615K, Last 607K SAAR.
10:30 – Natural Gas Inventories (Weekly): Last +44B cf.
11:00 – Kansas City Fed Manufacturing Index (Sep): Expecting 9, Last 17.
The Fed (All Times Eastern)
04:10 – Speaker: New York Fed Pres. John Williams.
08:00 – Speaker: Richmond Fed Pres. Tom Barkin.
08:50 – Speaker: Cleveland Fed Pres. Beth Hammack.
10:10 – Speaker: Philadelphia Fed Pres. Anna Paulson.
Today’s Earnings Highlights (Consensus EPS Expectations)
Before the Open: DRI (2.05), SNX (4.68)
After the Close: COST (6.52), FDXF (1.39)
At the time of publication, Guilfoyle was long SNDK and LMT equity.
