Tag: 2-Year Treasury Yield

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Asian Stocks Plunge on Fed Rate Hike Fears

Key Points

  • Headline CPI increased to 3.7% for the 12 months to September, up from 3.4% in August.
  • Energy prices rose 20.4% year-on-year, signaling stronger inflation ahead.
  • Financial markets now expect at least a 25-basis-point rate hike in December.
  • Investors reacted to the threat of higher interest rates slowing the AI rollout, with the Philadelphia Semiconductor Index falling more than 4%, and South Korea’s KOSPI index shedding more than 8.0% in Thursday trading.
  • The IMF’s quarterly Financial Stability Report this week also highlighted the potential for market turmoil, citing a correction in AI-related asset prices, rising sovereign debt yields, and the impact of AI frontier models on cybersecurity as key risks.

The headline consumer price index increased to 3.7% for the 12 months to September, up from 3.4% in August. Core CPI (excluding food and energy) increased to 2.6% from 2.4% in August.

CPI & Core CPI - Annual

Energy prices climbed 20.4% (right-hand scale below) over the 12 months, warning of a sharp rise in CPI that tends to follow with a 1- to 2-month lag, as in 2021-2023 below.

CPI & CPI Energy - Annual

Gasoline prices remain high, at $4.33 per gallon on October 12.

EIA US Gasoline Prices

Diesel eased slightly to $6.18 per gallon on measures to ease the shortage ahead of the November midterms. However, reserve releases aren’t a long-term solution, and the Persian Gulf conflict will likely drag on into next year.

EIA US Diesel Prices

Financial Markets

Several Fed speakers have hinted that the Fed won’t raise rates at the October (27-28) FOMC meeting, but will hike again in December (8-9). The 2-year Treasury yield jumped to 4.95% after Thursday’s CPI report but has since settled at 4.70%. That is still 70 basis points above the Fed’s current target range of 3.75%-4.00%, implying at least 3 more 25-bps hikes.

2-Year Treasury Yield (CNBC)

High-yield bond spreads have jumped more than 2.0% since Kevin Warsh’s keynote address at Jackson Hole on August 28, to above 12%. Widening spreads warn of likely distress among small- and mid-cap borrowers when their current debt matures and they must roll it over at much higher rates.

High-Yield Bond Spreads

Stocks

The Russell 2000 Small Caps ETF (IWM)2 is testing secondary support at 270 on the weekly chart below, while declining Trend Index peaks signal selling pressure. A breach of 270 would indicate a correction to test primary support at 240.

Russell 2000 Small Cap ETF (IWM)

The S&P 500 remains in an uptrend, but retreated  1.1%, its largest daily loss since July, as the Philadelphia Semiconductor Index fell more than 4%.

S&P 500

A breach of primary support at 11,000 in the Philadelphia Semiconductor Index (SOX) would be a strong bear signal for stocks.

Philadelphia Semiconductor Index (SOX)

Asian Stocks

South Korea’s KOSPI index fell more than 8.0% in Thursday trading.

KOSPI Index

A sell-off in global technology hardware stocks deepened Thursday, with Asian chipmakers tracking Wall Street losses as concerns over further Federal Reserve interest rate hikes, financing of artificial intelligence investments weigh on sentiment.

South Korean chip giant SK Hynix plunged over 10%, while rival Samsung Electronics fell 7.1%.

In Japan, technology investment giant SoftBank Group tumbled 7.9%. Semiconductor testing equipment maker Advantest dropped 6.9%, while chipmaking equipment supplier Tokyo Electron lost 5.4%.

….The declines come as investors grow increasingly concerned that higher borrowing costs could weigh on the massive capital spending required to build out AI infrastructure, putting pressure on technology companies that have benefited from the AI investment boom.

Chief executives of Broadcom and Intel warned on Monday that financing could become a major headwind to the AI boom, with Broadcom’s Hock Tan saying it could be bigger challenge to AI expansion than shortages of chips or electricity. (CNBC)

Treasury Market

10-year Treasury futures caught a bid, with yields falling to 5.10% from 5.30% earlier in the month as funds increasingly flow from equities to bonds.

10-Year Treasury Yield

The IMF earlier warned in its quarterly Financial Stability Report of the potential for market turmoil, citing three salient risks that could be near-term catalysts for a sharp tightening of financial conditions:

First, although core firms in the AI ecosystem have been profitable so far—easing pressure on AI-related equity valuations—weaker or less durable investment and profitability in AI could trigger a correction in AI-related asset prices, exacerbated by rising leverage, concentrated exposures, and circular financing arrangements.

Second, resurgent inflation or fiscal concerns could trigger a sharp rise in sovereign bond yields and spark broader market turmoil given the foundational importance of sovereign bonds. High public debt and rollover risks remain unresolved, increasing the chances that a rise in yields could occur in a disorderly manner, despite stable bond market liquidity and the recent unwinding of some leveraged trades.

Third, cyber threats constitute a growing systemic risk as financial services become more digital and interconnected. For their part, frontier AI models are emerging as both powerful enablers of cyberattacks and critical defensive tools. These risks by themselves do not necessarily threaten financial stability, but they could become a systemic risk—impairments to key financial intermediation and credit provision, with serious negative economic effects—if they are amplified by financial vulnerabilities.

The report also highlighted hedge funds’ highly leveraged repo positions and pursuit of crowded trades that “could amplify market stress, with spillovers to prime brokers and broader financial markets”.

Dollar & Gold

The Dollar has strengthened on the prospect of higher interest rates, with the Dollar Index testing resistance at 103 before retracing to test new support at 102.

Dollar Index

Gold weakened on the prospect of higher interest rates and a stronger Dollar, and will likely test primary support at $4,000 per ounce.

Spot Gold

Conclusion

Financial markets are unsettled by the threat of higher inflation driving up interest rates, which could interfere with funding of the AI data center rollout. Stocks are selling off as investors move into bonds, which has lowered the yield curve by roughly 20 basis points in a few days.

South Korea’s KOSPI and Japan’s Nikkei indices are falling, and a Philadelphia Semiconductor Index (SOX) breach of primary support at 11,000 would be a strong bear signal for US stocks.

A Bitcoin1 retreat below support at 80,000 would confirm a market shift to risk-off.

Bitcoin (BTC)

The last two weeks of October are typically a precarious time for stocks, as fund managers reposition after the end of the financial year. We advise stock traders to keep stops tight and investors to adopt a defensive stance by shedding more volatile assets.

Rising interest rates and a strengthening Dollar are bearish for Gold, which is expected to test primary support at $4,000 per ounce. However, the underlying forces driving higher rates—inflation, poor fiscal management, and bond market instability— are all bullish for Gold. We remain long-term bullish on Gold and view the current sell-off as an opportunity for steady accumulation.

Acknowledgments

Notes

  1. Cryptocurrencies are the highest-risk asset class, and we analyze Bitcoin (BTC) solely to identify risk sentiment in financial markets. Our analysis is not a recommendation to buy or sell BTC, nor is it a commentary on the merits of cryptocurrency.
  2. We analyze exchange-traded funds (ETFs) to determine market sentiment towards a specific sector, industry, or commodity. The analysis is not a recommendation to buy or sell, nor is it a commentary on the merits of the particular ETF.
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What’s Really Driving Treasury Yields?

Key Points

  • 10-year Treasury yields climbed to 5.3% in early October, up from below 4.0% in late February.
  • Central banks are hiking rates and lifting the yield curve.
  • QT by the ECB and Bank of Japan is increasing supply in bond markets.
  • A debt maturity wall and capital expenditure on AI data centers are increasing private debt issuance.

We all know what triggered the initial surge in long-term Treasury yields. The 10-year was trading below 4.0% on February 27 but jumped sharply after the US and Israel bombed Iran that weekend.

10-Year Treasury Yield

The new Fed Chair Kevin Warsh’s keynote speech at Jackson Hole on August 28 added further impetus. Warsh’s hawkish tone, though short on specifics, led the bond market to conclude that rate hikes were coming, with the 2-year Treasury yield jumping by nearly 70 basis points in the next 4 weeks.

2-Year Treasury Yield (CNBC)

Persistent inflation has given central banks little choice. Many are hiking rates, including the Fed, the ECB, the Bank of Japan, and even Australia’s RBA. One notable exception is the People’s Bank of China.

Does this mean that rates will soften if oil prices fall? If the conflict in the Persian Gulf were settled and oil flows returned to normal, oil prices would likely settle after inventories are restored, but are unlikely to return to pre-war levels. However, we attach a higher probability to a protracted war that could drag on for years, with oil prices remaining elevated.

In either case, we are unlikely to see another bout of QE, which drove the 10-year yield below 4.0% for more than a decade.

10-Year Treasury Yield & Fed QE

Central banks are still repairing their balance sheets (QT) after the last expansion, which will likely keep upward pressure on long-term yields for several years. The Bank of Japan (BOJ) has shed $3 trillion of securities since its pandemic peak, while the Fed shed $2.4 trillion under Jerome Powell before resuming purchases in December last year.

Central Bank Total Assets

The European Central Bank (ECB) has gone even further, shedding $4.3 trillion or 53% of its QE assets (blue line below) since mid-2022. The green total assets figure is distorted because the ECB revalues its Gold reserves to market prices at the end of each quarter.

ECB Total Assets

Both the ECB and BOJ are steadily reducing the securities on their balance sheets, increasing supply in bond markets and adding upward pressure on yields. The Fed under Warsh will likely resume its gradual downward path.

A notable exception is the PBOC, which has steadily expanded its balance sheet, adding close to $2 trillion since 2020. This highlights the extent of China’s economic problems. Despite a record trade surplus of $1.2 trillion, the PBOC continues to debase China’s currency to soften the impact of the domestic contraction.

PBOC Total Assets

Debt Maturity Wall

Adding fuel to the increased supply from central bank QT (apart from the PBOC) is the wall of private-sector debt maturities that will need to be rolled over in the next few years.

Debt Maturity Wall

Many corporations took advantage of record-low interest rates in the early 2020s to refinance at lower rates. That debt is now maturing and will need to be rolled over at much higher rates.

AI Financing

Hyperscalers need to spend $9.6 trillion between 2025 and 2032 to build 183 GW of data center capacity, according to estimates by Stijn Van Nieuwerburgh. Morgan Stanley estimates that more than half of the roughly $2.9 trillion required to meet hyperscalers’ incremental compute needs over 2025–2028 will come from outside capital (Morgan Stanley Research, 2025).

Falling Private Demand

“The cure for high prices is high prices.”

The abuse of the large captive investment market for government bonds, suppressing yields to artificial lows through QE, has reduced demand for traditional insurance annuities and pensions. Insurers and pension funds have adapted by increasing exposure to private debt, infrastructure, and alternative investments while reducing allocations to government bonds.

The chart below highlights the decline in France’s government bonds (OATS) held by domestic insurers and pension funds (green below), from about 25% in 2014 to less than 11%.

France: Government Debt Financing

Conclusion

Central bank QE has reduced investment demand for government bonds from traditional investors, such as insurers and pension funds, due to artificially low yields. The US Treasury is increasingly reliant on hedge funds to fund new issuance through highly leveraged repo-market trades.

A number of central banks are now shedding QE assets, increasing supply in bond markets. At the same time, many developed economies run large deficits, increasing government debt issuance. Capital expenditure on data centers and a large debt maturity wall have also increased private debt issuance.

Many central banks are hiking interest rates to curb inflation. It is unclear how long the war in the Persian Gulf and related oil shortages will last, adding to inflationary pressures.

Rising bond yields increase the cost of servicing government debt and drive up deficits, pushing bond markets towards a crisis.

The imbalance between debt supply and demand in bond markets is expected to maintain upward pressure on long-term yields. However, two factors could change this: (1) a steep decline in government deficits, financed through spending cuts or tax hikes; or (2) more central bank QE. Both seem unlikely, but desperate times may call for desperate measures.

Acknowledgments

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Something Has to Break

Key Points

  • The S&P Global US Composite flash PMI shot up to 58.4% for September.
  • 10-year Treasury yields jumped to 5.114%.
  • We expect 10-year yields to climb higher, causing a correction in stocks.
  • The S&P 500 retreated, heading for a test of support between 7500 and 7600.

The S&P Global US Composite flash PMI shot up to 58.4%, the fourth consecutive month of accelerating growth and the strongest expansion in private-sector activity since July 2021.

S&P Global Composite PMI

The move was echoed by a healthy rise in the European Union’s equivalent flash PMI to 53.1%.

S&P Global Composite PMI

The surge in economic activity boosted market expectations of further Fed rate hikes, with the 2-year Treasury yield jumping to 4.876% compared to the current Fed funds target range of 3.75% – 4.00%.

2-Year Treasury Yield

The 10-year yield broke through resistance at 5.0%, closing at 5.114%, the highest level in more than 20 years. We expect a retracement to test the new support level, but respect will likely confirm another advance. Our medium-term target is 6.0%.

10-Year Treasury Yield

The S&P 500 retreated to 7700 and is headed for a test of support between 7500 and 7600. A breach would signal a correction to test primary support at 7300.

S&P 500

The Outlook for Treasuries

The spread between the 10-year and 2-year Treasury yields is shrinking as in previous Fed rate-hiking cycles (red arrows below). A dip below zero typically precedes a recession. The dip below zero from 2022-2024 was an exception, caused by the unprecedented scale of fiscal and monetary stimulus during the pandemic.

10-Year Treasury Yield minus 2-Year Yield

The Atlanta Fed’s GDPNow model projects real GDP growth of 5.1% in the third quarter, a 3.6% increase from Q2.

Atlanta Fed GDPNow

Even without an increase in the GDP deflator, driven by rising energy prices, we expect nominal GDP to jump from an annual rate of 6.6% in Q2 to more than 10.0% in Q3.

10-Year Treasury Yield & Nominal GDP Growth

The strong divergence between nominal GDP and the 10-year Treasury yield would provide further stimulus to an already overheating economy, causing a sharp increase in inflation.

Conclusion

The Fed is trapped in an inflationary boom that will likely drive long-term yields much higher than 5.0%. Rising interest rates will increase the interest cost on the US Treasury’s $40 trillion debt, expanding the budget deficit above $2.0 trillion.

The Fed is constrained by its swollen balance sheet and will likely resist further QE to suppress long-term interest rates and assist the US Treasury.

Surging economic activity, compounded by crude oil and diesel supply shortages, is also expected to drive a sharp increase in inflation, adding to the Fed’s challenges.

Something has to break, and we are adopting a highly defensive posture, heavily overweight in Gold, short-term financial instruments, and defensive stocks with strong pricing power and stable income streams.

Acknowledgments

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Warsh Hikes While Trump Fumes

Key Points

  • The FOMC voted unanimously to hike the Fed funds rate by 25 basis points to a target range of 3.75% to 4.00%.
  • President Trump criticized the FOMC decision, demanding that the Fed slash interest rates to “1% or less” on Truth Social.
  • Backing a rate hike was a politically brave move by the new Fed Chair, Kevin Warsh, as it will likely sour his relationship with the President.
  • The Fed hike likely avoided a sharp spike in long-term Treasury yields as the bond market was growing restless over loose monetary and fiscal policy.

Fed Chair Kevin Warsh cemented his reputation as an inflation hawk, voting in support of a unanimous FOMC decision to hike the Fed funds rate by 25 basis points to a target range of 3.75% to 4.00%.

President Trump condemned the move, demanding on Truth Social that the Fed slash interest rates to “1% or less.”

“We are ‘carrying’ almost every country in the World, and that cannot go on any longer,” Trump wrote in a Truth Social post.

“LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST!” he wrote. (CNBC)

Updated dot plot projections show a strong majority of Fed officials expect another rate hike this year. Warsh did not submit a projection, but 16 of 18 participants expected at least one more rate hike in 2026, of which 4 projected 2 hikes.

FOMC Dot Plot

The 2-year Treasury yield climbed to 4.73%, pricing in 3 further rate hikes.

2-Year Treasury Yield (CNBC)

10-year Treasury yields held firm at 5.0%.

10-Year Treasury Yield

A failure of the Fed to act would likely have caused a bond sell-off, with the 10-year yield spiking upwards, reflecting bond market disappointment with perceived lax monetary and fiscal policy.

Long-term yields will likely still rise, but at a more measured pace than if the Fed’s commitment to stable prices were in doubt.

The Fed Chair gave three factors that are driving long-term yields higher:

  1. The economy is strengthening and at close to full employment;
  2. Increased competition for capital as AI hyperscalers seek to fund capital spending; and
  3. Geopolitical instability.

He did not mention lax fiscal policy, with $40 trillion of federal debt and annual deficits approaching $2 trillion a year, which we consider a fourth factor driving higher yields.

Conclusion

We may have misread the new Fed Chair as a “political animal.” He has delivered on his commitment to fight inflation despite opposition from President Trump. In doing so, he has likely placated the bond market, which was driving long-term yields higher. We still expect long-term rates to rise, but at a more measured pace.

“The era of free money is definitely over,” Kim Crawford, fixed-income portfolio manager at JPMorgan Asset Management, told the Financial Times today. “The bond market is looking for discipline.”

We expect further rate hikes if the economy continues to grow faster than existing capacity allows, fueling increased inflationary pressure.

Credit growth above 4.0% is not consistent with low inflation. A 4.0% target would be consistent with the 2.3% projected real GDP growth and 1.7% inflation (below the Fed’s 2.0% target).

Bank Credit Growth

Acknowledgments

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Fed’s Warsh Hawkish But Won’t Hike

Key Points

  • Fed Chair Kevin Warsh’s keynote speech at Jackson Hole had a distinct hawkish tone.
  • Financial markets responded with a sharp jump in the 2-year Treasury yield to 4.36%.
  • However, Warsh’s hands are tied by political considerations, and no rate hike is likely.

We are convinced that the FOMC will not hike rates at its September meeting despite the Fed Chair’s hawkish speech at Jackson Hole on Friday, August 28.

The new Fed Chair set a hawkish tone in his keynote address to the Fed’s Jackson Hole economic symposium in Wyoming.

“Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, ‌we have work to do. That’s our job … our mandate … and our charge to keep,” Warsh said.

….”The Fed’s predominant focus right now should be on prices.”

The 2-year Treasury yield jumped by 9 basis points within 20 minutes of Warsh’s speech and ended Friday up 13 basis points at 4.36%, more than 60 basis points above the Fed’s current target range of 3.5-3.75%.

2-Year Treasury Yield (CNBC)

However, Warsh is unlikely to support a rate hike before the November midterms because of the political implications.

Warsh has strong Republican credentials, having served in President George W. Bush’s White House and as the youngest board member in the Federal Reserve’s history. He has also spoken about the importance of free trade, the Fed’s political independence, and a strong Dollar — views that could lead to conflict with the current President. However, he has close links with Treasury Secretary Scott Bessent, having worked as partners at Stan Druckenmiller’s Duquesne Capital. He also has strong MAGA ties through his father-in-law, Ronald Lauder, son of Estee Lauder, who is a decades-long friend and ally of Donald Trump.

One of Warsh’s two appointees at the Fed is Paul Winfree, who authored the chapter on the Federal Reserve in the Project 2025 blueprint. The other is Daniel Heil, a fellow at Stanford’s conservative Hoover Institution, where Warsh served before joining the Fed.

Warsh enjoys the trust of President Trump, who regularly consults him on economic matters. A far stretch from the strained relationship with his predecessor, Jerome Powell, whom Trump did his best to undermine, including having him investigated by the Justice Department.

President Trump has a long history of turning on his political allies if they do not do his bidding. He repeatedly criticized his earlier appointee, Fed Chair Powell, for not lowering interest rates, going so far as to suggest that Powell was a bigger threat to the United States than Chinese President Xi Jinping. Powell insisted that the Fed made decisions based on data without regard to politics, but that did not seem to placate the President. The Fed then cut rates in September 2024, two months before the last presidential election, which seems to have convinced Trump that Powell was politically motivated.

We believe that Kevin Warsh is politically astute, having won nomination as Fed Chair despite his old-school Republican values. As a recent Trump appointee, presiding over a Fed that hikes rates two months before the upcoming midterm elections would likely be taken by the President as a betrayal of his trust. It would invite similar persecution to what his predecessor faced. That would be politically stupid.

Conclusion

The new Fed Chair is unlikely to convince President Trump of the need to hike rates ahead of the November midterm, and is unlikely to support such a move without his assent.

The President will not want to upset his predominantly blue-collar MAGA base, especially after the Iran debacle, when he needs a strong turnout in the November midterms. Your typical MAGA voter is not that sophisticated and is unlikely to be persuaded by arguments that higher interest rates will reduce inflation in 12 months’ time, but will instead be incensed by an increase in interest payments on their car loan and credit card.

This is kitchen table economics. That is what is driving Fed monetary policy.

Acknowledgments

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War, Inflation & Gold to the Moon

Key Points

  • The war in the Persian Gulf is hotting up, with both sides trading missile strikes and threatening to blockade shipping.
  • Brent Crude rose to $85.40 per barrel.
  • Crude and finished product inventories are declining, increasing upward pressure on gasoline and diesel prices.
  • Interest rates are rising in expectation of higher inflation.
  • The Dollar is rising in expectation of higher rates.
  • Gold and commodities face increased selling pressure as the Dollar strengthens.

DUBAI/WASHINGTON/CAIRO, July 13 (Reuters) – The U.S. military carried out a third consecutive night of strikes against Iran on Monday and two tankers came under ​fire in the Strait of Hormuz, after President Donald Trump said the United States was reinstating its blockade of Iranian shipping in the Gulf and would ensure that the strategic waterway stayed open — for a fee.

….Soon after, the United Arab Emirates Ministry of Defense said Iranian cruise missiles struck two Emirati oil tankers, the Mombasa and Al Bahiyah, while transiting the southern lane of the strait in Omani territorial waters, killing one crew member and injuring eight others.

The ​United Kingdom Maritime Trade Operations agency said a tanker had been hit by an unknown projectile while traveling 40 nautical miles northeast of Oman’s Qalhat and that all crew were safe.

“The Hormuz Strait is OPEN, and will remain OPEN, with or ⁠without Iran. We are reinstating THE IRANIAN BLOCKADE,” Trump had said earlier on Monday on Truth Social.
“The U.S.A. will be, from this point forward, known as ‘THE GUARDIAN OF THE HORMUZ STRAIT’, but as such, and as a matter of FAIRNESS, will be reimbursed, ​at the rate of 20% on all cargo shipped.”

….The UN’s shipping agency pushed back against Trump’s proposal, saying it opposes any fees for straits used in international navigation and stressing that there is no legal basis for introducing mandatory tolls on strait transits.

….Iran’s state TV cited the Iranian army as saying that it targeted a “hostile” U.S. vessel with cruise missiles and U.S. facilities and equipment in ​Kuwait with drones. Iranian media also said the Revolutionary Guards shot down a U.S. MQ-1 drone over Hormuz, while sirens sounded early on Tuesday in Bahrain – home to another U.S. military base.

Brent Crude (September futures) jumped to $85.40 per barrel.

Brent Crude Futures (ICE September'26)

The Strategic Petroleum Reserve (SPR) fell to 319.5 million barrels on July 3, a decline of 6 million barrels for the week.

EIA Strategic Petroleum reserve (SPR)

Overall crude stocks, including SPR, declined to 1.517 billion barrels, the lowest level in 23 years.

EIA Crude & Petroleum Products Inventories (incl. SPR)

Stocks of Gasoline (blue) and Diesel (brown) are close to their floor of 200 million barrels and 100 million barrels, respectively.

EIA US Gasoline & Distillate Inventory

Gasoline prices declined to a US average of $3.777 per gallon by July 6.

EIA US Gasoline Prices

Diesel prices also softened to $4.578 per gallon.

EIA US Diesel Prices

However, the 3-2-1 crack spread3 widened to $62.17 per barrel, indicating that refiners are taking advantage of low finished product inventories to widen their margins. However, there is speculation that crude futures prices are being distorted, and refiners are paying more than the quoted price per barrel to secure supplies.

Energy Channel: 3-2-1 Crack Spread

The Dow Jones Industrial Average is tentative, with three red candles over the past five days, and a fall below 52,000 would signal a correction.

Dow Jones Industrial Average

Financial Markets

2-year Treasury yields jumped to 4.29%, more than 50 basis points above the target range for the Fed funds rate. Financial markets are anticipating higher crude prices to increase inflationary pressure, forcing the Fed to raise rates.

2-Year Treasury Yield (CNBC)

The Chicago Fed National Financial Conditions Index continues its downtrend, indicating ample liquidity in financial markets.

Chicago Fed National Financial Conditions Index

However, Bitcoin1 is testing primary support at 60,000, warning that financial markets are becoming risk averse. A fall below support would warn of a sharp contraction in liquidity in financial markets.

Bitcoin (BTC)

Treasury Markets

10-year Treasury yields jumped to above 4.6% in anticipation of higher inflation and higher interest rates. A breakout above 4.7% would offer a target of 5.0% — a third rail for the economy.

10-Year Treasury Yield

Dollar & Gold

The Dollar Index rallied in expectation of higher interest rates.

Dollar Index

The stronger Dollar triggered another Gold test of primary support at $4,000 per ounce. However, rising Trend Index troughs below zero indicate buying pressure at the support level.

Spot Gold

Energy Transition

The strong Dollar is also causing a sell-off in energy transition metals.

Sprott Uranium Miners ETF2 (URNM) is testing primary support at 50. Declining Trend Index peaks below zero warn of strong selling pressure.

Sprott Uranium Miners ETF (URNM)

Sprott Copper Miners ETF2 (COPP) crossed below its 50-week moving average, indicating another test of primary support at 32.

Sprott Copper Miners ETF (COPP)

Sprott Lithium Miners ETF2 (LITP) is testing primary support at 11.

Sprott Lithium Miners ETF (LITP)

Sprott Critical Materials ETF2 (SETM) has broken primary support at 30. A follow-through below the previous week’s low would confirm a target of 20.

Sprott Critical Materials ETF (SETM)

Conclusion

We expect a steep rise in crude prices. Lower inventory levels indicate there are fewer reserves to cushion the impact of a supply shortage. Falling gasoline and diesel inventories warn of a sharp price rise ahead.

Interest rates are rising in anticipation of higher inflation, fueled by energy prices, which in turn increases support for the Dollar.

The strong Dollar increases selling pressure on precious metals and commodities such as uranium, copper, lithium, and critical minerals.

High inflation may reduce speculative demand for Gold in the short-term because of the likely increased carrying cost, but it increases investment demand for the metal as an inflation hedge. What will light the afterburners, however, is if the Fed suppresses interest rates to support the Treasury market.

Chinese demand is the largest driver of Gold prices in the long term, and low prices will likely trigger an increase in buying, both through official channels and via backdoor non-monetary Gold purchases.

Acknowledgments

Notes

  1. Cryptocurrencies are the highest-risk asset class, and we analyze Bitcoin (BTC) solely to identify risk sentiment in financial markets. Our analysis is not a recommendation to buy or sell BTC, nor is it a commentary on the merits of cryptocurrency.
  2. We analyze exchange-traded funds (ETFs) to determine market sentiment towards a specific sector, industry, or commodity. The analysis is not a recommendation to buy or sell, nor is it a commentary on the merits of the particular ETF.
  3. The 3-2-1 crack spread is calculated by subtracting the price of 3 barrels of crude from the sum of 2 barrels of gasoline and 1 barrel of diesel. The result is then divided by 3 to reflect the refiner’s gross profit per barrel of crude.
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IRGC Maintains its Stranglehold on US Treasury Yields

Key Points

  • The IRGC warns shipping that alternative routes not mandated by Tehran were “unacceptable and completely dangerous.”
  • A cargo ship on an alternative route near the coast of Oman is struck by a projectile believed to be a drone.
  • US aircraft retaliated with an attack on Iran’s coastal radar and missile sites.
  • 10-year Treasury yields are falling in response to low oil prices.
  • However, Core PCE figures for May warn that inflation is spreading across the broader economy.
  • Gold rallied above primary support at $4,000 per ounce.

Iran’s Revolutionary Guards are tightening control over shipping passing through the Strait of Hormuz, forcing ships to follow their advised route or face the consequences.

From the Financial Times:

At least four tankers have been turned back by Iran while attempting to exit the Strait of Hormuz on Thursday, as Tehran appeared to challenge an evacuation route issued by the International Maritime Organization.

The IMO on Tuesday said that after “discussions with all parties” it had established a safe evacuation corridor hugging the Omani coast for ships and seafarers that had been stuck in the Gulf for more than 100 days.

But the Blue Star I, SG Pegasus, Azumasan and Omega Trader either made a U-turn or changed course from the IMO’s route on Thursday, according to ship tracking data. Analysts said the diversions were likely to have been made after instructions from Iran’s Islamic Revolutionary Guard Corps, which said routes not mandated by Tehran were “unacceptable and completely dangerous.”

That setback comes one day after 62 vessels managed to traverse the strait, according to data from Windward, the best single-day showing since hostilities commenced on Feb. 28.

Later, an IRGC drone attack was reported on a cargo ship traveling close to the coast of Oman.

LONDON/MAMANA/DUBAI, June 25 (Reuters) – The U.N. International Maritime Organization paused its operation to escort ships through the Strait of Hormuz on Thursday after a vessel reported an attack, reigniting concerns about ‌whether a preliminary deal to end the Iran war will hold.

The cargo ship said it was hit close to Oman by a projectile, British navy agency UKMTO said, hours after Tehran warned vessels against taking routes that it had not approved.

Two U.S. officials told Reuters that Iran had fired on the ship, while Iran’s Persian Gulf Strait Authority, which Tehran established to manage requests for ships to travel through the strait, said vessels outside routes it has set will ​not be guaranteed safe passage.

“Consequences arising from passage through unauthorized routes shall be the responsibility of the owner, operator, and vessel commander,” the Iranian authority said.

The US military retaliated with airstrikes on Friday:

WASHINGTON/DUBAI, June 26 (Reuters) – The U.S. military attacked Iran on Friday in response to an Iranian drone strike on a ‌cargo ship in the Strait of Hormuz, with each country accusing the other of violating terms of a ceasefire agreed on last week.

U.S. Central Command said aircraft struck missile and drone storage locations and coastal radar sites, and a U.S. official reported the operation had concluded. Iran said a projectile struck the area around a pier in Sirik in southern Iran, and that Iranian naval forces responded by striking U.S. military targets in the region.

Brent Crude futures (Aug’26) fell 2%, however, on news that Israel and Lebanon had signed an interim ceasefire agreement while terms of a broader agreement are negotiated.

Brent Crude Futures (ICE August'26)

JERUSALEM/BEIRUT/WASHINGTON, June 26 (Reuters) – Israel and Lebanon signed a framework agreement in Washington on Friday following several days of talks to secure an end to fighting between Israel and Iran-backed Hezbollah militants, though ‌both sides framed the deal as an initial step.

Lebanese Ambassador Nada Moawad and her Israeli counterpart Yechiel Leiter signed the trilateral document with the U.S. at the State Department in Washington, providing few details.

Israeli Prime Minister Benjamin Netanyahu said the agreement allows Israeli forces to continue to occupy southern Lebanon if Hezbollah does not disarm.

PCE Inflation

Headline PCE inflation jumped to 4.1% for the 12 months to May 2026, while the Core PCE index, excluding Food and Energy, rose to 3.4%. The rising Core index indicates that inflation is no longer affecting just energy-related items, but is spreading into the broader economy.

PCE & Core PCE

The monthly increase for May was even higher at annualized rates of 5.4% and 3.8% for Headline and Core PCE, respectively.

PCE & Core PCE Inflation - Monthly

PCE for Energy remained elevated at 4.03% for May, an annualized rate of 48%, but we expect it to decline in June.

PCE Energy Inflation

However, higher fuel prices are now baked into supply chain costs and will likely persist for the next 3 to 6 months before inflationary pressures ease. PCE for Services, excluding Energy and Housing, increased at an annualized rate of 6.3% in May, indicating that inflationary pressures are spreading across the broader economy.

PCE Services Inflation

The spread of inflation across the broader economy increases pressure on the Fed to raise interest rates to slow the economy and halt the spread.

Treasury & Financial Markets

10-year Treasury yields are falling sharply in response to lower oil prices, with expectations of lower inflation running ahead of the supply chain lag.

10-Year Treasury Yield

2-year Treasury yields also eased to 4.12% but remain well above the Fed funds target range of 3.5%-3.75%, with at least one 25-basis-point rate hike expected this year.

2-Year Treasury Yield (CNBC)

Bitcoin1 continues testing primary support at 60,000. A breach would signal another decline, signaling a hard shift in financial markets toward risk-off.

Bitcoin (BTC)

Stocks

The S&P 500 lost ground for the fourth week, while declining Trend index peaks indicate secondary selling pressure, warning of a correction to test 7000.

S&P 500

The Magnificent 7 mega-cap stocks are leading the sell-off, with the Roundhill Magnificent 7 ETF (MAGS) headed for a test of primary support at 55. One of the key signals of the final stage of a bull market is when former leading stocks no longer participate in the advance.

Roundhill Magnificent 7 ETF (MAGS)

Dollar & Gold

The US Dollar Index broke through resistance as the oil price fell, but is now retracing to test its new support level. Respect would signal an advance with a target of 104.

Dollar Index

Gold recovered above primary support at $4,000 per ounce, buoyed by Dollar weakness and declining Treasury yields, which reduce the opportunity cost of holding Gold and Silver.

Spot Gold

Silver has also retraced to test its former support level at $60 per ounce.

Spot Silver

The decline in the broad DJ-UBS Commodity Index since March 2026 coincides with the steep rise in 10-year US Treasury yields. Rising long-term interest rates increase the opportunity cost of holding non-yielding commodities and precious metals.

DJ-UBS Commodity Index

Conclusion

The uptrend in 10-year Treasury yields has reversed amid falling oil prices and will likely strengthen demand for commodities and precious metals, provided crude oil prices remain low.

Iran’s Revolutionary Guards are keeping tensions in the Strait of Hormuz simmering. Not enough to spark a major conflict with the US, but sufficient to keep shipping in the Strait of Hormuz under their control. The US continues to deplete its Strategic Petroleum Reserve to alleviate the supply shortage and keep prices low, but this makes it more vulnerable to further threats to restrict the flow of oil through the Strait.

President Trump would be happy for negotiations with Iran to be drawn out, provided that the Strait of Hormuz remains open to shipping in the interim. But the Iranians are aware that their leverage expires with the November midterm elections, and we can expect ongoing threats to close the Strait. The path of crude oil prices is therefore difficult to predict.

We expect a long-term secular uptrend in Gold and Commodities relative to the Dollar. This is based on CBO projections that federal debt (held by the public) relative to GDP will exceed its post-WWII high of 106% before 2030 and expand to 175% of GDP by 2056.

CBO Projections of Debt Held by the Public as a Percentage of GDP

Aside from default, the only solution to the debt spiral is to suppress interest rates and allow inflation to run hot, so that GDP expands faster than federal debt, as in the 1950s to 1970s.

However, the budget deficit is running at close to 6.0% of GDP, and will likely expand further as the US invests in critical supply chains and ramps up defense spending, so even suppressing interest rates is unlikely to be sufficient.

CBO Projected Federal Deficit as a Percentage of GDP

 

Acknowledgments

Notes

  1. Cryptocurrencies are the highest-risk asset class, and we analyze Bitcoin (BTC) solely to identify risk sentiment in financial markets. Our analysis is not a recommendation to buy or sell BTC, nor is it a commentary on the merits of cryptocurrency.
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A Lull in Hostilities

Key Points

  • Hostilities in Lebanon faded.
  • Tankers transiting the Strait of Hormuz increased.
  • Brent Crude futures fell to $77.64 per barrel.
  • 2-year Treasury yields rose above 4.20% amid expectations of tighter Fed monetary policy.

Brent Crude futures (Aug’26) fell to $77.64 per barrel on reports of a lull in hostilities in Lebanon.

Brent Crude Futures (ICE August'26)

Prices fell more than 3% on Monday after ​the United States granted Iran a 60-day sanctions waiver following initial peace talks, ​and as officials reported a lull in hostilities in Lebanon under the ⁠broader agreement.

“The gradual increase in oil flows through the Strait of Hormuz continues to weigh ​on the market,” said ING analysts in a note.

Two crude tankers with just under 2 ​million barrels of oil sailed through the Strait of Hormuz on Monday, ship-tracking data showed, in a sign that traffic was picking up following weaker flows on Sunday due to concerns over passage through the ​waterway. (Reuters)

The text of the Memorandum of Understanding signed by the US and Iran can be separated into two parts. The MOU is mostly “talks about talks” where the parties merely agree to negotiate the terms of a Final Deal, but it contains an agreement to cease hostilities while negotiations take place, including:

  • Immediate termination of hostilities on all fronts, including Lebanon.
  • Ensuring the territorial integrity and sovereignty of Lebanon.
  • The US to lift its blockade of Iranian shipping.
  • The US to waive existing sanctions against Iranian crude oil and petroleum exports.
  • The US to release frozen or restricted funds and assets belonging to Iran.
  • Iran will make its “best efforts” to ensure the safe passage of shipping through the Strait of Hormuz.

The MOU offers Iran a financial reward in exchange for allowing safe passage through the Strait. The deal is tenuous, and already the IRGC has threatened to close the Strait due to ongoing hostilities in Lebanon.

Israel is not a signatory to the MOU, and will not readily agree to the first two terms if it feels that they compromise their national defense. The Gulf States are also not signatories, and will similarly defend their national interests.

Financial Markets

2-year Treasury yields climbed to 4.209%, more than 45 basis points above the Fed funds target range, in expectation of tighter Fed monetary policy.

2-Year Treasury Yield (CNBC)

The Chicago Fed National Financial Conditions Index below -0.50 continues to signal easy monetary conditions.

Chicago Fed National Financial Conditions Index

Bitcoin1 is testing primary support at 60,000, signaling a shift in financial markets to risk-off. A breach of support would warn of a market-wide contraction.

Bitcoin (BTC)

Treasury Markets

10-year Treasury yields firmed to 4.51%, suggesting another test of resistance at 4.75%.

10-Year Treasury Yield

Stocks

SpaceX retreated to test its June 12 opening price of 150.

SpaceX

The Magnificent 7 also lost ground, with the Roundhill Magnificent 7 ETF (MAGS) retreating below support at 68 on the weekly chart below. Declining Trend Index peaks warn of a correction.

Roundhill Magnificent 7 ETF (MAGS)

The S&P 500 also shows signs of secondary selling pressure.

S&P 500

Dollar & Gold

The Dollar strengthened amid expectations of higher short-term interest rates. Breakout of the US Dollar Index above 100.50 indicates an advance to 103, but first expect retracement to test support at 100.

Dollar Index

Gold is testing primary support at $4,000 per ounce, with declining Trend Index peaks warning of selling pressure. A breach of $4,000 would indicate another decline, but beware of a bear trap. Gold is in a secular uptrend that we expect to last for decades.

Spot Gold

Energy

The Dow Jones Global Oil & Gas Index broke support at 575, signaling a primary downtrend.

Dow Jones Global Oil & Gas Index

Uranium

Sprott Uranium Miners ETF2 (URNM) broke primary support at 58, also signaling a downtrend.

Sprott Uranium Miners ETF (URNM)

Copper

Copper is testing support at 13,500, and declining Trend Index peaks warn of selling pressure. A breach of support would warn of a bull trap, with a decline to test the 50-week moving average.

Copper

Sprott Copper Miners ETF2 (COPP) reinforces the bearish copper chart, retreating from resistance between 44 and 45 while Trend Index peaks below zero warn of persistent selling pressure.

Sprott Copper Miners ETF (COPP)

Lithium

Sprott Lithium Miners ETF2 (LITP) is also retreating, and a fall below 13 would test primary support at 11.

Sprott Lithium Miners ETF (LITP)

Critical Minerals

Sprott Critical Materials ETF2 (SETM) shows similar signs of selling pressure, and another test of primary support at 30 is likely.

Sprott Critical Materials ETF (SETM)

Conclusion

Brent Crude and oil and gas stocks are falling as the Strait of Hormuz is tentatively reopened, but the real test will be the impact of global strategic reserves. A continued decline would cause a rebound in energy prices.

Financial markets are shedding high-risk assets amid expectations of tighter monetary policy. Declining Trend Index peaks on the S&P 500 signal a correction.

The Dollar is strengthening, and Gold is headed for another test of support at $4,000 per ounce, but these moves run counter to their secular trends where we expect Dollar weakness and Gold strength.

Energy metals are experiencing a broad sell-off amid expectations of lower oil and gas prices if the Strait of Hormuz is reopened.

Uncertainty remains high, and we expect elevated volatility in the months ahead. We adopt a defensive stance, with minimal exposure to high-multiple growth stocks and long-duration financial assets. Value stocks with stable income streams and short-duration financial assets are a haven in times of volatility, but we still expect a secular uptrend in Gold and maintain our position.

Acknowledgments

Notes

  1. Cryptocurrencies are the highest-risk asset class, and we analyze Bitcoin (BTC) solely to identify risk sentiment in financial markets. Our analysis is not a recommendation to buy or sell BTC, nor is it a commentary on the merits of cryptocurrency.
  2. We analyze exchange-traded funds (ETFs) to determine market sentiment towards a specific sector, industry, or commodity. The analysis is not a recommendation to buy or sell, nor is it a commentary on the merits of the particular ETF.
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S&P 500 tunnel vision

Stocks are growing increasingly bullish, after strong earnings results for the last quarter, with the S&P 500 closing above 5000 for the first time.

S&P 500

Even small caps are growing increasingly bullish, with the Russell 2000 ETF (IWM) testing resistance at 200. Breakout would signal that the current narrow advance is broadening.

iShares Russell 2000 Small Caps ETF (IWM)

The Price-to-Sales ratio remains elevated, at 2.56, warning of long-term reversion towards the mean at 1.70.

S&P 500 Price-to-Sales

Sales growth improved slightly to 5.2% for the December quarter, compared to December 2022. But this is before inflation; so real growth remains low.

S&P 500 Sales Growth

Operating margins shrunk to 10.7%, with 75.6% of corporations having reported, from earlier estimates of 11.0%.

S&P 500 Operating Margin

Treasury Market

Ten-year Treasury yields are testing resistance at 4.20%. Breakout would offer a target of 4.60% — a bear signal for stocks.

10-Year Treasury Yield

The 2-year Treasury yield — normally a reliable leading indicator of the Fed funds rate — is currently rising, warning that Fed rate cuts are likely to remain on pause for longer.

Fed Funds Rate & 2-Year Treasury Yield

The long-term challenge facing Treasury is the rising projected budget deficits, with debt likely to grow at a faster pace than GDP. CBO projections vastly understate the likely deficit as Brian Riedl explains below:

CBO Projected Deficits

Revised CBO Projected Deficits

Gold & the Dollar

The Dollar Index retraced to test support at 104 but is greatly influenced by the direction of the Fed funds rate and Treasury yields.

Dollar Index

Gold is ranging between $2000 and $2055 per ounce. The lower close at $2024 suggests another test of support at $2000.

Spot Gold

2023 is the first time that the gold price has kept rising while ETF gold holdings are falling. Cause of the divergence is believed to be strong central bank purchases over the past 12 months.

Gold ETF Tonnage

Conclusion

The S&P 500 is vastly overpriced when we compare the current price-to-sales ratio of 2.56 to its long-term average of 1.70. Sales growth is also falling, while operating margins are shrinking. Investors seem to have tunnel vision, focused on rising prices rather than underlying fundamentals.

Long-term yields are rising, with the Fed expected to postpone rate cuts until mid-year, which is bearish for stocks.

Federal deficits are expected to grow to $3.6 trillion by 2034, warning of rising inflationary pressure and higher Treasury yields. The Fed may suppress long-term yields but that is likely to increase inflationary pressure even more.

The short-term outlook for Gold is bearish — if long-term yields rise — but the long-term outlook is strongly bullish because of expected rising inflation and central bank purchases.

Acknowledgements

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Santa rally: Monetary easing offsets China woes

China’s economy is struggling despite injection of moderate stimulus and efforts to support a collapsing real estate sector. Shrinking demand from China threatens a global economic contraction. G7 central banks have responded with monetary easing, causing a broad rally in stocks. This is most likely a bear market rally, with far shorter duration than a bull market.

China’s Shanghai Composite Index is testing primary support at 2900, warning of an economic contraction. The Trend Index peak near zero confirms selling pressure.

Shanghai Composite

Copper, however, has penetrated its descending trendline. Follow-through above 8500 would test resistance at $8750 per metric ton, threatening a wide double-bottom reversal with a target of $9500. Breakout above $8750 would signal global economic recovery, while reversal below $7800 would warn of a global recession.

Copper

US Stocks

The S&P 500 is testing it 2022 high at 4800, buoyed by injections of liquidity into financial markets.

S&P 500

The equal-weighted S&P 500 broke resistance at 6300, suggesting a broader rally than just the top 7 stocks. Retracement that respects the new support level would confirm the target at 6665.

S&P 500 Equal-Weighted Index ($IQX)

The Russell 2000 small caps ETF (IWM) threatens a similar breakout above 200, offering a target of 240. Breakout would confirm that investors are growing more aggressive (risk-on) and downplaying risks.

Russell 2000 Small Caps ETF (IWM)

Interest Rates

Ten-year Treasury yields are retracing to test resistance at 3.9% or 4.0%; respect is likely and would confirm the target of 3.5%.

10-Year Treasury Yield
An increase in supply of Treasury Notes will test bulls’ conviction next week:

A raft of fresh, post-Christmas government bond supply will put that comprehensive bullishness to the test. Next week, Treasury will auction $57 billion, $58 billion and $40 billion in two-, five- and seven-year notes, respectively. That’s up 20%, 15% and 7% from their average sizes over the past four monthly auctions. (Grant’s Current Yield)

The 2-year Treasury yield (purple below) is falling in anticipation of Fed rate cuts next year. A peak in the 2-year tends to lead the first rate cuts by 6 to 9 months. The signal misfired with the SVB banks crisis in March but the October peak warns of Fed rate cuts in Q2 or Q3 of 2024.
Fed Funds Rate Minimum Target & 2-Year Treasury Yield

International Stocks

The FTSE 100 is testing resistance at 7700, with a Trend Index trough at zero signaling buying pressure.

FTSE 100

The DJ Stoxx Euro 600 — reflecting the top 600 stocks in Europe — broke resistance at 470. Follow-through above 480 would test the 2022 high of 494.

DJ Euro Stoxx 600

Japan’s Nikkei 225 is testing long-term resistance at 33750. Breakout would signal a fresh primary advance but declining Trend Index peaks show a lack of commitment from buyers.

Nikkei 225 Index

The ASX 200 is testing resistance at 7600, buoyed by strong iron ore prices and falling long-term bond yields. A sharp rise in the Trend Index indicates buying pressure but reversal below 7400 would warn of a correction to test support at 7000.

ASX 200

Gold & the Dollar

The US Dollar Index respected resistance at 102.50, confirming the target at 100. Trend Index peaks below zero signal strong selling pressure.

Dollar Index

Gold broke through resistance at $2050, closing at $2053 per ounce. Expect retracement to test the new support level; respect would confirm another attempt at $2100. A falling Dollar and increased bullion demand from central banks is expected to maintain upward pressure on Gold prices.

Spot Gold

Conclusion

Stocks are rallying in response to falling long-term Treasury yields and in anticipation of Fed rate cuts next year. But falling LT Treasury yields is a medium-term rally in a long-term bear market, with LT yields expected to rise in 2025. Fed rate cuts are also a bearish sign, normally preceding a recession by several quarters — falling earnings are definitely not bullish for stocks.

Investors will need to be agile, to take advantage of the current bullishness in stocks while guarding against:

  • a trend reversal in long-term yields; and
  • signs that the broad economy is falling into recession.

Vacation

This is our last newsletter of the year as we close our office for two weeks over Christmas and the New Year.

We wish all our readers peace and goodwill over the festive season and hope for a less tumultuous year ahead.

The Magpie by Claude Monet

The Magpie by Claude Monet

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