It was a strange day, for sure. The Treasury rate fell quite a bit, certainly more than I would have expected given the naming of a Treasury Secretary. Of course, the solid 2-yr auction results at 1 p.m. added to the decline in 10-year rates yesterday.
Still, how much lower can the 10-year go when considering a real 3% growth rate, an assumed 2% inflation rate, and a 3% to 3.5% Fed’s fund rate? Unless the Treasury curve is going to remain flat or near flat forever. Because yesterday, the 10-2 curve is inverted again. Most of my math seems to suggest a 5% nominal rate, on the 10-year at a minimum, and in a normal world, about 6%.
The dollar was down, but not nearly as much as the 10-year rates. The US Dollar Index (DXY) only fell by 55 bps. There was very little to change for the dollar.
Inflation swaps were also down a lot yesterday, with the 2-yr swap falling by ten bps to finish the day back at 2.6%.
Gold is down over 3% on the day.
Oil was down about 3%, too.
If you just look at these few things, it would seem to suggest the market suddenly decided that inflation would no longer be an issue and that the new Treasury Secretary was going to fix all that ails the US economy. While there is no doubting his credentials, I’m not sure that will likely be the case.
However, digging deeper, I see that yesterday’s move looks more about positioning and perhaps the unwinding of those trades than anything else. What was particularly odd, I think, is the change in the term structure of the 10-year Treasury future. I’m not nearly as familiar with the implied volatility shifts in bonds as I am in stocks, and my view could be completely wrong. Still, implied volatility for higher bond prices (lower rates) collapsed yesterday, while IV for lower prices (higher rates) jumped.
That might suggest that the move was partially due to short-covering. Perhaps some thought that Trump would pick somebody wild as Treasury Secretary, and those positions were covered with an actual good pick.
Anyway, gold has looked weak and probably didn’t need much of a reason to move lower. It is quite possible that gold just continues that move down that started last week and heads back to those lows around $2,500. If Bessent favors a strong dollar and retains the reserve status, there is no need for a dollar hedge.
The same may very well be true for Bitcoin. We will know a lot of it falls that 10-day exponential moving average because if that happens, it may go to 88,000, or the 20-day moving average.
yesterday, Nvidia (NASDAQ:NVDA) made a compelling case for breaking that rising wedge. The level to watch next probably comes at $130. If broken, it opens the floodgates to the gap at $118.
If that were to happen, it would probably drag the Nasdaq 100 down.
And probably the S&P 500…
I forgot the last point I wanted to make as my kids distracted me. It must not have been that important.