Friday Charts: The market is a story
The bond vigilantes you heard about this week aren’t real
Artwork by Crystal Le
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“The human mind is a story processor, not a logic processor.”
— Jonathan Haidt
Is the bond market sentient?
You might think so after reading about how “bond vigilantes” pushed the 30-year Treasury yield above 5% this week.
It was a dramatic move and our impulse, as always, was to explain it by anthropomorphizing the market — projecting motives, desires and fears onto an amalgamation of prices.
CNN, for example, ran a headline promising to explain “Why the bond market is so worried about the ‘Big, Beautiful Bill.’”
The proximate cause appeared to be passage of a budget bill whose tax cuts, if enacted and extended for a full decade (as they usually are), would likely add at least $5.3 trillion to the national debt.
But the bond market is not a person, so it probably can’t “worry” about tax cuts or budget deficits.
Even more carefully worded reporting like Reuters’ assessment that “investors worried about the country’s increasing debt burden” might be overstated — because correlation and causation in markets is notoriously difficult to untangle.
At Jim Simons’ quantitative hedge fund, Renaissance Technologies, a data entry error once caused a trading algorithm to buy 5x as many wheat futures as it intended, making prices shoot artificially higher.
The next day, the Wall Street Journal reported that analysts attributed the move to “the market” anticipating a poor upcoming harvest.
It’s not an unusual occurrence: Every headline about what’s happening in markets is simply a guess at what may have caused it.
Simons didn’t bother to try.
“Our entire premise,” he explained, “was that human actors would act the same way humans did in the past.”
It worked out pretty well for him: Over 30 years, Simons’ flagship Medallion Fund returned 66% per year (before fees).
66%! Per year!
Instructively, Simons achieved those astonishing returns by letting his algorithms make all the decisions — algorithms that were able to spot patterns of human behavior in markets without reimagining the market as a person.
I take that as a reminder that the bond market cannot coordinate to punish fiscal irresponsibility or enact monetary justice, as the term “vigilante” implies.
Instead, its movements simply reflect the expectations of countless investors who are constantly making all kinds of decisions for all kinds of different reasons.
Still, metaphors like “bond vigilantes” can be a helpful shorthand when we’re trying to discern patterns in the noise — which, being humans, we can’t help doing.
The collective decision making of all those investors pushed 30-year yields to 5.15%, presumably on tax-cut fears — and then back down to 5.03%, presumably on tariff fears.
I guess.
Let’s check the charts to see what other patterns we can make out.
Inflation is not the story:
The Cleveland Fed’s Nowcast model sees US CPI rising 0.12% in May. That works out to just 1.44% annualized, so I think we can rule out “inflation worries” as the reason bond yields are up.
Bonds may be decoupling from GDP:
Juliette Declercq highlights the unusual divergence between Treasury yields and the ISM’s survey of manufacturing activity — higher yields and lower GDP is, um, not what we want.
The reverse Laffer Curve:
On the campaign trail, President Trump said that his proposed tax cuts would “be revenue-neutral when you add growth because we’re going to have magnificent growth.”
But history shows that rising deficit spending is correlated to slower GDP growth. “Stimulus does not stimulate,” Research Affiliates concludes.
A listicle for the US economy:
The Atlanta Fed has Q2 growth tracking at 2.4%, but Torsten Slok lists 10 reasons why things are likely to get worse thereafter.
Annoyingly, they are all self-imposed. Analysts at Deutsche Bank have an even longer list — they warn it will be “death by a thousand cuts” for the US economy.
Europe’s self-imposed tariffs:
President Trump threatened the EU with a 50% tariff on goods this morning, which is disappointing after things had seemed to have settled down. But the EU imposes similar tariffs on itself — Luis Garicano estimates that the internal barriers to trade (country-specific rules and regulations, mostly) between EU countries are equivalent to an internal tariff of 45% on goods and 110% on services. Ouch.
The EU stock market does not seem worried, however:
Bitcoin (in purple above) is up 17% over the past month, but it still hasn’t quite caught up with European equities — they’re up 21% on the year.
The vigilantes visit Japan:
The bond vigilantes have always been conspicuously absent in Japan despite the country’s world’s leading debt-to-GDP ratio of 250%.
But they may finally have arrived. This week, yields on 30-year Japanese government bonds rose above 3% for the first time on record (which dates back to only 1999 when the 30-year tenor was first issued).
Fun Japan fact: The four longest-operating companies in the world are all in Japan, led by the construction company Kongō Gumi, which was founded in the year 578! Not fun Japan fact: This morning’s inflation data showed the price of rice is up 98% year over year.
Foreigners are a little worried about the US:
Torsten Slok shows that foreign participation in 30-year Treasury auctions is at a multi-year low. But the y-axis on his chart starts at 57.5% so I guess they’re not that worried.
For when markets are closed:
Americans subscribe to nearly five streaming services per household now — because we love stories, of course.
Have a great weekend, storied readers.
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