Holy Sh*t! The Bond Market Just Broke

The bond market just broke as yields extended their climb as oil advances stoking rate hike bets. The 30-year bond has now reached levels last seen since 2007 and the two-year note it's exceeding four and a half percent for the first time since 2024. This is all on the back of Brent crude as it tops 102 a barrel as the conflict intensifies with Goldman's call of 120 barrel now looking like it's entirely possible. But some of the very strange happened at today's 30-year bond auction as the market was expecting worst case scenario and yet the internals were impressive. Indirect or foreign investors were worth a whopping 79.5 percent. This is up from 66.9 percent in August and the second highest on record going all the way back to October of 2024. What are foreign investors seeing here as the market is expecting inflation to surge right along oil prices? Let's dive in and what could be one of the biggest contrarian trades of the year because oil let's take a look at the USO ETF it's surging higher today and looking to go parabolic and we're going to talk about some trade setups later including oil so stay with me because right now the issue that the market seen which is really driving yields has everything to do with shortages of refined products as US diesel crack spreads are now trading around 102 dollars a barrel and this is happening as demand is about to see peak levels for diesel with stocks now falling down to 2003 levels. This is going to be a huge issue for US consumers and businesses we're going to be forced to pay higher prices it's going to lead to massive demand destruction. But let's take a look at why all of a sudden everyone's buying the long bond who's outside of the US despite the fact that this setup today with rising oil prices has now boosted expectations for a fed rate hike next week to about 70 percent and a fully price in a move by October instead of December. One of the challenges for the central banks here is that raising interest rates into an oil shock well it usually has detrimental outcomes. Now of course the market is saying look wash you've got to raise rates and you can see clearly on this chart of the federal funds rate in blue it gets to your yields in red that the two-year note it leads the fed higher and you can see that's in every hiking cycle and right now it's very clear the market saying look we want you to raise rates they want to validate all their short positions on the treasury bond market something that wash may not want to see happen particularly since we know treasury secretary scott besant wants to see interest rates go down not up the problem is they continue to go in the wrong direction we see that the first central bank that made a policy mistake is a european central bank they raised rates on thursday as expected and of course bond prices slumped and what they're seeing here is that there is going to be inflation running well above target for an extended period and this is exactly what the market's saying here is interest rates have to go higher look oil is going higher and yet foreign investors are saying stop this doesn't make any sense we're going to buy all the bonds we can and there's a good reason why because when you take a look at rising energy prices in red we've got west texas intermediate against inflation that's a cbi in blue what you can see is spikes in energy well they're not inflationary at all on the onset they are but look what happens after you get a massive amount of disinflation you can see that again around 96 97 you can see it going into the dot com bubble the financial crisis we actually got outright deflation how about around 2015 we see it even mixed in there all the way up into 2020 again how about that big market correction in 22 very disinflationary now the market saying look we have to have rising interest rates here because of rising energy prices and foreign investors are saying very clearly can't you see what's coming there's going to be a huge amount of demand destruction because u.s consumers cannot afford higher prices when that happens you get disinflation you get lower interest rates and that means bond prices surge and again is what's set up to be a massive contrarian trade and if you want to know how to turn these contrarian trade ideas into real money in your pocket well that's exactly why i developed my two trading systems is to tell us exactly when we need to buy and check out this recent trade to my cta timer pro subscribers they use machine positioning we told them to buy the uso etf right here on the open and then we said sell it up here for a nice five percent gain or if they want to hold it they've got the option to do it but maybe you don't want to trade you're saying steve i just need to know how to adjust my portfolio well in both of my reports we have five active models all using both of my training systems together to tell you if you want tactical if you want conservative you want to be aggressive to tell you everything you need to know now how do you need to sign up for this all you need to do is scroll down grab those links in the description below and be sure to use a coupon code for your free 30-day trial i'll see you there and as we talk about policy mistakes here thursday's move puts euro area policy makers further ahead of their peers in reacting to the energy price surge that's produced the fastest inflation in almost three years but keep in mind do you remember the last time dcb hiked rates into an energy shock was back in 2007 and look what followed that is the risk of exactly what we're facing right now because you can see this is a policy mistake that central makers make over and over let's talk about the fed because we've got the funds rate in blue against west texas intermediate and red and going all the way back to the dot-com bubble you can see as energy prices are rising the fed's hiking rates and we go right into recession let's move forward to the financial crisis you can see as early as 2004 what happens the fed's raising rates against rising energy prices and inflation and next thing you know you see energy prices break out but what happens the fed is cutting into the financial crisis you can see once again the fed is following inflation high around 2018 only to then cut and now everybody's saying central bankers are going to have to continue to raise rates that interest rates are only going to go higher the things are a new normal but what we've seen here in the energy markets and higher interest rates as we look into the real economy but we can see very clear signs this is going to be disinflationary in a big way and let me show you because today we got the u.s producer price index which has now risen the most in three months on energy surge so what we're seeing from producers is they're going to be forced to raise prices that means consumer prices are headed higher and of course it means rates must go right along with it that was a big driver of some of the move this morning in yield and the producer price index rose 0.4 percent in august from the prior month that's the most since may and a massive 5.4 percent from a year earlier when you strip out food and energy of course some we all have to consume look at this the gauge advanced 0.2 percent last month and 4.6 percent from a year ago so what we're seeing is this is all being driven by energy and food and of course as consumers are forced to spend money on both of those it means that less money on other things that's why the core didn't increase near as much and you can see the evidence in the link between producer prices by commodity for final demand and blue against energy prices again west texas intermediate and red and you can see periods where oil is going down what happens producer prices drop and so right now the market's saying look energy prices have to only go higher and yet in yesterday's show i made the case of why another big contrarian trade here could be energy prices dropping and we'll talk more about that a little bit later in the show but let's continue because core ppi again excluding food and energy only rose 0.2 percent month over month and yes the core actually did rise 4.6 year over year but you can see clearly it's stalling out and so what this is an indication of is that goods inflation is re-accelerating while service inflation is slowing and again all a sign that demand from consumers is going to pull back because more money has to go to food and energy costs but there's a big problem here because what we're seeing is that producers are being squeezed at the margin now how do we know that because when we take consumer prices and we subtract off producer prices what you want to see is it being positive that means over that horizontal black line as producers are able to make money there's a big issue here let's take a look because you can see it's negative right now we can go back to around 2018 what was the fed doing they were cutting rates and how about around 2022 well we had a big market correction but the fed they weren't really raising rates at this point and about around 2025 well we saw some initial rate cuts now everybody's once again saying look we have to have higher rates and what producers are saying look we need demand to go up not down we're getting squeezed here this is causing us to being forced to absorb things that we don't want to normally tariff related costs and or we got to pass them on to customers which we know can't afford them and as a result what have we seen margins fell 0.2 percent for wholesale and retail trade activities and ultimately as margins get compressed what does this lead to rising unemployment rate you can see very clearly here as we look at corporate profits in blue a contraction below that horizontal black line what do you get an increase in the unemployment rate now the risk we have right now is we've seen margins be very thin for the past few years it's only recently that they've jumped now the issue is is are we going to see manufacturers and producers hold on to employees if their margins get squeezed i don't think they are because i don't think they have the margin to and the evidence is clear in that cpi and ppi chart but another driver of energy prices and yields today was that Saudis have told OPEC that output is slumped again down to the lowest level since 1990 suggesting that energy prices are going to stay up which again if you're saying wait a minute steve i thought you said there's a contrarian trade on the short side of oil well hang on let's continue because the even lower level than previous wartime reached in april with the lowest figure reported by the kingdom since the beginning of the gulf war and when we take a look at the big issue here why i see a massive contrarian move it's when we take a look at average hourly earnings of production and non-supervisory employees in blue overlay crude oil prices in red what you can see is that every time there's a rise in energy prices if there's not a corresponding increase in wages to absorb it what happens energy prices drop each and every time and right now you can see average hourly earnings they're plunging and yet everyone's saying that energy prices are going to 120 a barrel maybe 150 or 200 and yet consumers are saying go ahead i can't afford it and ultimately as you get demand destruction everything comes unglued and we can see this in real time as existing home sales today slumped in august supply now hitting a monster 10-year high this is all going to backfeed eventually to the manufacturing sector as we now see existing home sales dropping for the third straight month and again the best time of year to sell your home and we had some of the worst months you could ask for and as we go into the winter season well the risks are that we're going to see layoffs increase in the housing sector and related sectors because again the problem is we're now seeing the only two times since the fall 2024 the sales have dipped below 4 million in fact you can go back to the era of the financial crisis and see levels like this suggesting it's only going to get worse and yet look at what chief economist laurence young of the nar said he said look mortgage rates and home sales moving in completely opposite directions so it's not surprising to see a mild dip in home buying activity due to mortgage rates because he's saying look home buying demand despite higher interest rates is no doubt being supported by rising wages well how about this let's take a look at average hourly earnings of production non-supervisor employees now overlaid against new one family homes for sale in the u.s that's in red and what you can see is you've got all these home for sales and wage growth continues to decelerate and it's starting to look a lot like the dot-com bust and yet another factor here which is driving rates higher and inflation expectations as president trump says ahead of today's 30-year auction that he's pledging a massive payout of potentially five thousand dollars for each u.s adult the problem is the market saying look this would accelerate inflation by fueling consumer spending now politics aside many experts say look there's really no way this can happen congress is unlikely to prove it but if they were to the inflation expectations from that kind of money hitting the economy are outrageously high particularly when the cost for this could exceed over a trillion dollars meaning we're gonna have to borrow a ton of money but let's talk about some trade setups here let's go back to the u.s oil chart where we started the show out with you can know and we talked about this yesterday anytime you get above these two horizontal purple lines what do you start to see in the market demand destruction this is why i wanted to see that housing market slide because what it's telling us is as energy prices go up consumer spending has to drop now what i'd be looking for and again i do not short but if you were to you want to look at a potential pullback off of this big move you get a couple of days of that and you can see everybody long is likely to be chasing to the downside but what about the market here as we look into triple q's big cap down today again you think rising interest rates for all these ai companies that are borrowing billions and billions of dollars this is going to hurt their bottom line but again if oil prices and rates come down i still think we got to move all the way back up to the top end of this range if not maybe a move down to the bottom and first before we get a retest of those highs that's where i'd be looking to perhaps short the broad market but how about the long bond here because this record-breaking auction sees huge stop through and what this could set up for is a monster contrarian trade and you can see tlt gapped way down today and if then it started to find buyers here and why is it finding buyers it's not just because foreign investors it's because everybody realizes when you get higher interest rates higher energy prices and slowing wage growth you get demand destruction growth and inflation expectations start to move lower and quickly and there's some validation that this could be a massive contrarian trade and it's right here in xlf and this is a large financial etf now keep in mind if rates were indeed going up here you should see the xlf etf going higher because banks would say hey look we believe we can lend at these levels and that means our profit margins are going to be even bigger but look at what the chart's saying here they're saying very clearly that higher interest rates are not going to lead to more lending growth and what it's going to do is ultimately lead to lower rates and that means for bank profits down and for their stock price likely to follow here and so what we saw a 30-year yield spiked overnight and this morning on the notion we could get stimulus a failed auction that producer prices were up and that all prices were only going to go higher and yet what we found out is in the 30-year auction foreign investors came in in a big way and for good reason why now you're seeing in real time demand destruction is about to hit the u.s economy when that does growth and inflation expectations go down right alongside interest rates with that i'm steve ammeter thanks for watching thanks for being fans bye now