October 5th Financial News

Daily News

Summary:

ADP was lower than expected; Canadian working classes are in financial emergency; the largest healthcare group in the U.S. goes on strike...

[Quick Facts]

1. Possible successors to McCarthy have started to emerge.

2. Former Fed Vice Chair: Interest rate hikes are over.

3. The largest healthcare group in the U.S. goes on strike.

4. Canadian working classes are in financial emergency.

5. ADP was lower than expected.

6. Bailey: The job of fighting inflation is not done.

[News Details]

Possible successors to McCarthy have started to emerge

Possible successors to former House Speaker McCarthy after his removal have emerged on Wednesday, with Steve Scalise, the No. 2 Republican in the House of Representatives, and Jim Jordan, the main opponent of Democratic President Joe Biden, saying they would seek to serve in this position. Other candidates may join the competition, which is a long and messy battle.

Republicans hold a majority in the House of Representatives. Republicans are scheduled to vote on a successor on October 11th and will hold a meeting to hear candidate statements before it. The leadership battle is taking up precious time. Congress needs to extend the government spending appropriation before it expires on November 18th. It also faces tasks such as renewing agricultural subsidies and funding for nutrition projects.

Former Fed Vice Chair: Interest rate hikes are over

Former Fed Vice Chair Clarida said in an interview that he believed in September that the Fed might raise interest rates once during this cycle, but has now changed his view because the bond market can do some work for the Fed. He said the Fed is now highly dependent on data as its policy has entered restrictive territory. At the same time, he believes that the Fed's soft-landing prospect is feasible, but there are obvious risks: stubborn inflation, as well as resilient consumption and the headwinds of the economy, and expects the Fed's further rate hikes could be challenged in the future.

The largest healthcare group in the U.S. goes on strike

More than 75,000 employees of Kaiser Permanente, one of the largest medical groups in the United States, went on a three-day strike early on the 4th, affecting six states and nearly 13 million people, making it the largest healthcare strike ever and adding fuel to the nationwide strikes across industries that have lasted for several months.

The strike will cause Kaiser to suspend non-essential medical services, such as routine doctor visits, as radiologists, pharmacies, optometrists and hundreds of other support workers have joined the strike.

Since the epidemic, a large number of healthcare workers have resigned due to excessive work pressure, so labor relations in the medical field have been in tension. The union has demanded a comprehensive increase in wages to cope with the current rising cost of living and strengthened employment protection for subcontracted and outsourced employees, improved medical benefits for retired employees, as well as solving manpower shortages, and improved the working environment.

At present, the UAW has previously launched a strike, demanding a 40% salary increase and the elimination of job levels, and the strike continues to expand. The Writers Guild of America (WGA) reached an agreement with Hollywood’s major film studios last week, including an increase in royalties, TV "writers' rooms", mandatory staffing, and protections against the use of AI, ending a five-month strike. However, the American Federation of Television and Radio Artists (AFTRA) is still on strike. In Las Vegas, more than 50,000 service industry workers may soon go on strike to protest employer cutbacks and increased workloads. These demands are not much different from those in the healthcare industry.

So far, about 3.62 million workers have gone on strike across the U.S. this year, compared with only 36,600 in the same period two years ago.

Canadian working classes are in financial emergency

More and more working Canadians are facing financial stress as they struggle to make ends meet amid high inflation and interest rates. According to research conducted by the National Payroll Institute and the Canadian Financial Wellness Laboratory, the number of people facing financial stress has increased by 20% YoY, 37% have a job, 63% said they need to spend their entire salary, while 30% must spend more than they earn. This means many people are going into debt or using up any savings they already have to cover daily expenses.

ADP was lower than expected

ADP, known as the "small non-farm payrolls", increased by 89,000 people last night. The data was far below economists' expectations of 150,000. The data showed that the leisure and hospitality industry drove employment growth in September, offsetting declines in professional and business services, manufacturing, trade and transportation, and layoffs were widespread among large companies.

After the announcement of ADP, interest rate futures traders significantly reduced their bets on the Fed raising interest rates within the year, and it is expected that the Fed has ended its rate hike cycle. But traders bet highly on interest rate hikes in November and December after the job openings data was released on Tuesday. However, the market's expectations of "higher for longer" have not significantly cooled down.

Bailey: The job of fighting inflation is not done

Bank of England Governor Bailey said in a speech yesterday that the job was not done on fighting inflation, although he expected those pressures to dissipate quickly this year. Headline inflation is expected to fall to 5% or just below 5% by the end of 2023, but to back to the 2% target is "still a long way to go".

Officials are scrutinizing labor market data for signs of easing inflationary pressures. However, the record pay growth may be a lagging indicator. Wage growth has raised concerns about a wage-price spiral. If this is a lagging indicator, the lag is longer than it has been in the past.

[Focus of the Day]

UTC+8 17:45 BoE Deputy Governor Broadbent Delivers a Speech

UTC+8 17:45 ECB Chief Economist Lane Delivers a Speech

UTC+8 20:30 U.S. Weekly Initial Jobless Claims (SA)

UTC+8 21:00 ECB Governing Council Member Nagel Delivers a Speech

UTC+8 21:45 ECB Vice President Guindos Delivers a Speech

UTC+8 22:30 ECB Governing Council Member Villeroy Delivers a Speech

UTC+8 22:40 Minneapolis Fed President Neel Kashkari Delivers a Speech

UTC+8 23:00 ECB Governing Council member Nagel Delivers a Speech

UTC+8 23:30 Richmond Fed President Barkin Delivers a Speech on the Economic Outlook

UTC+8 00:00 San Francisco Fed President Daley Delivers a Speech at the Economic Club of New York

UTC+8 00:15 Fed Governor Barr Delivers a Speech

Risk Warnings and Disclaimers

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Economic

Forex

Yen Intervention in focus

The market is still digesting Tuesday's rumoured intervention, and it is trying to evaluate the likely next steps from Japanese authorities. The yen has been left unprotected with the market continuously favouring the U.S. dollar due to the massive yield differential. Despite this yen suffering, the Bank of Japan needs sufficient economic evidence in order to start scaling back its policy accommodation, starting with an abandonment of negative rates that have been in place since February 2016.

BoJ needs stronger economic data

The latest quarterly Tankan was mostly positive, retail sales continue to surprise on the upside, but the August inflation figures confirmed the deceleration seen in other regions, potentially making the BoJ's job even harder. However, the BoJ has probably been waiting for this pullback in inflation as one of the policy board members, Tamara, recently mentioned that "Japan's inflation is likely to slow for time being, and then accelerate moderately again".

The BoJ cares a lot about wages

For this inflation acceleration to be confirmed, the BoJ is putting a lot of faith on continued wage increases. Since taking over in April, Governor Ueda has been quite explicit about the importance of wages, and therefore earnings, on finally achieving an exit from the current loose monetary policy stance.

The April 2023 wage round was very positive from a monetary policy perspective, and Governor Ueda has been nonstop on the wires highlighting this situation. At his September 25 speech in Osaka, he stated that the "key to whether Japan is close to achieving our target is whether wage growth leads to moderate rise in inflation".

Earning data could whet the BoJ's appetite

Importantly, on Friday we will get the August labour cash earnings and the overall household spending numbers. The former has been recording decent annual increases, but the BoJ would prefer higher prints going forward. Their wish might come true on Friday as the August figure is seen accelerating to 1.5% YoY from 1.3% in July. Similarly, the overall household spending has been hovering in negative territory, but economists forecast an improved print at -4.0% YoY.

Understandably, the current figures are not extremely pleasing to the eye for BoJ members, but they verify the improvement across the economic spectrum seen over the past year in Japan. In this context, the often-overlooked leading economic index is also published on Friday. It is expected to jump higher again, building upon the continued improvement recorded by this forward-looking indicator since the January 2023 trough.

Yen is trying to recover against the euro

The yen has been on the back foot against most developed economies' currencies. The focus is understandably on the U.S. dollar/yen pair, which is trading a tad below the 150 perceived threshold, but euro/yen is exhibiting a similar tendency. It peaked at 159.75 on August 30, which is the strongest level since February 22, 2007. It is now hovering around the 155 region as the market is digesting Tuesday's rumoured intervention. A positive set of data could allow the bears to aim for a lower euro/yen print, but at the end of the day, the continued threat of market intervention by the Japanese authorities will mostly determine the market reaction function. Earnings Data on Schedule as Yen Intervention Dominates Sentiment_1

Earnings Data on Schedule as Yen Intervention Dominates Sentiment_1

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Damon

Economic

Bond

Japanese government bonds fell further on Wednesday, increasing pressure on the central bank to raise its yield-curve cap and prepare for an end to its negative interest-rate policy.

Market expectations that the Bank of Japan is getting closer to lifting interest rates have pushed bond yields to the highest in a decade. Five-year yields climbed to levels last seen in 2013 and the 10-year equivalent reached 0.8% for the first time since August that year, following similar moves for longer-maturity debt in recent days.

The BOJ said late Wednesday it would conduct an operation to supply funds to banks on Oct 6, signalling its intent to keep interest rates in check.

Swap rates used to hedge against or bet on bond yield shifts have also surged. Meanwhile, debt yields in the US are rising even faster than those in Japan, adding to the turmoil and sparking concern that investors will demand higher rates to keep their money in Japanese bonds.

Investors worldwide are watching developments intently given the risk that upticks in Japan’s yields may spur institutions from life insurers to pension funds to cut back their massive holdings of overseas debt, including US Treasuries.

The yen’s slide toward multi-decade lows against the dollar is making the BOJ’s job more difficult because holding yields down tends to weaken the currency. It depreciated past 150 to the dollar on Tuesday, raising alarm in the government and speculation that Japan may have entered the market to arrest the move.

“It looks like the ground is being set up in rates markets to prey on the vulnerability of the BOJ, the finance ministry and the government,” said Shoki Omori, chief desk strategist at Mizuho Securities Co. “Policy rates that will stay higher for longer and political disorder in the US will push not only Treasury yields higher but JGBs as well and it’s not easy for the BOJ to stop it.”

Japan’s 10-year overnight indexed swaps touched 1% on Wednesday, the highest level since January, suggesting that investors are hedging against the risk that the benchmark 10-year yield will reach the central bank’s effective ceiling. That’s even after governor Kazuo Ueda has insisted that the central bank remains far from a policy shift.

Five-year JGB yields rose two basis points to 0.34%, following US Treasury rates higher during the Asian day, and Japan’s 10-year counterpart traded at 0.8%.

The rise in JGB yields is largely due to US Treasury yields increasing, and also speculation that the BOJ may revise the negative rate policy and YCC early, said Jun Ishii, a senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities Co. “Overnight-indexed swaps will also depend upon these factors.”

The message from US markets, which is resonating around the world, is one of higher rates for longer. Federal Reserve vice chair for supervision Michael Barr said the biggest question before central bankers was how long to leave rates elevated, while known hawk Michelle Bowman reiterated her call for multiple hikes. Global government bonds lost 4.2% in the July-September period, the biggest quarterly drop in a year.

Source: Bloomberg

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SAXO

Economic

Bond

The Surge in Treasury Yields

After the latest Federal Open Market Committee (FOMC) meeting on September 20, 2023, the 10-year Treasury yield saw a remarkable surge of 47 bps, reaching 4.82% as of October 4. This spike came after it closed at 4.36% the day before the FOMC meeting. Many market pundits attributed this sudden and substantial sell-off in the Treasury market to the hawkish stance adopted by Fed officials. This shift in rhetoric was further underscored by the removal of 50 bps of rate cuts for 2024 from the FOMC's Summary of Economic Projections compared to the June projections. Some claimed that the Federal Reserve was signaling a commitment to keeping the target Fed Fund rate "higher for longer."

Unpacking the Term Premium

To comprehend the factors driving the Treasury market's sell-off, it's essential to dissect the concept of the term premium. The term premium, as succinctly explained by the New York Fed, consists of two elements: expectations regarding the future path of short-term Treasury yields and the term premium itself. The term premium can be seen as the compensation investors demand for bearing the risk that interest rates may change during the bond's lifespan. Essentially, it serves as an insurance premium against the uncertainty of future yields compared to current expectations.

Analyzing Historical Patterns

To better understand whether the sell-off in US Treasuries is predominantly due to a rise in short-term interest rates or an increase in term premiums, we can turn to historical data. The New York Fed has employed the Adrian, Crump, and Moench (ACM) model to estimate the term premia of Treasury securities with maturities ranging from 12 months to 10 years, dating back to 1961. Figure 1 depicts this historical data, with the blue line representing the 10-year Treasury note yield and the green line illustrating the estimated term premium using the ACM model. Understanding the Surge in Bond Yields: Term Premium, not “Higher for Longer”_1

Understanding the Surge in Bond Yields: Term Premium, not “Higher for Longer”_1

A noticeable pattern emerges from this analysis. During specific periods, such as March 1967 to May 1970, March 1971 to September 1975, December 1976 to February 1980, June 1980 to September 1981, and June 2003 to June 2004, surges in yields were primarily driven by expectations of a higher interest rate path. In contrast, during other periods like August 1986 to October 1987, October 1998 to January 2000, December 2008 to June 2009, and July 2012 to December 2013, surges in yields were more influenced by substantial increases in term premiums.

Recent Market Dynamics

Turning our attention to recent market dynamics, the current bond bear market, which commenced in August 2020, initially witnessed the 10-year Treasury yield rising due to an increase in the term premium. However, from September 2021 onwards, the surge in yields was primarily driven by a significant upward adjustment in expectations of interest rate hikes. During this period, the term premium remained relatively subdued, fluctuating within a range between zero and minus 100 bps (Figure 2). Understanding the Surge in Bond Yields: Term Premium, not “Higher for Longer”_2

Understanding the Surge in Bond Yields: Term Premium, not “Higher for Longer”_2

Notably, a shift occurred in July of the current year. The 10-year Treasury note experienced a 95 basis point increase in yield, climbing to 4.68% on October 2, 2023, from 3.75% on July 19, 2023. This surge was entirely attributed to a substantial 117 basis point increase in the term premium over the same period (as illustrated in Figure 3). Similarly, following the September FOMC meeting, the 10-year yield rose by 27 bps to 4.68% as of Oct 2 from 4.41%, with the term premium increasing by 55 bps, transitioning from -33 bps to +22 bps. Contrary to media headlines and pundit commentaries suggesting expectations of a "higher for longer" interest rate path, the ACM model's estimate indicates a decrease in interest rate expectations over the life of the 10-year Treasury notes since the September FOMC meeting. Understanding the Surge in Bond Yields: Term Premium, not “Higher for Longer”_3

Understanding the Surge in Bond Yields: Term Premium, not “Higher for Longer”_3

Understanding the Surge in Bond Yields: Term Premium, not “Higher for Longer”_4

Factors Influencing Term Premium

Adrian, Crump, and Moench's study suggests that term premiums tend to rise during specific economic conditions. These conditions include periods when the economy is entering a downturn, when professional forecasters disagree on future bond yields, and when investors become increasingly uncertain about future Treasury yields. Currently, these conditions seem to be in place.

Additionally, one can conjecture that the increase in uncertainty about the future trajectory of inflation, the Federal Reserve's tolerance for deviations of inflation from the 2% target, speculation about the Fed potentially resetting the inflation target, questions about the long-term level of the Fed's neutral rate, uncertainty surrounding the demand for upcoming large Treasury issuance, a rise in the risks of a liquidity event in the Treasury market, and concerns about of rising fiscal dominance are all contributing factors.

Historical Perspective on Term Premium

Over the past six decades, the term premium for the 10-year Treasury note has typically been positive, with only a brief departure from this pattern occurring since 2015. This period of negativity in term premiums was an anomaly. The mean average term premium over this historical period was +151 bps, while the median stood at +154 bps.

Though the term premium has recently returned to positive territory, registering at 22 bps as of October 2, 2023, it still falls below the mean and median levels observed over the past six decades. This suggests the potential for a mean reversion of the term premium to higher levels, especially given the various factors previously discussed.

Investment Implications

In light of the aforementioned analysis, certain investment implications become apparent. We recommend focusing on the short end of the Treasury curve as opposed to the long end. This preference is grounded in the anticipation that the Fed will implement rate cuts in the first half of 2024, even amid what might seem like hawkish rhetoric. These rate cuts are expected to materialize as signs of a weakening US economy emerge. Furthermore, the Fed's efforts to prevent a liquidity event in the Treasury market may lead to reductions in policy rates.

Additionally, the Fed may consider discontinuing interest payments of 5.4% on reserve balances and terminating fixed rate Temporary Open Market Operations that offer 5.3% on overnight reverse repos. This could result in annual savings of USD250 billion for the Fed and incentivize banks to withdraw a substantial portion of their USD3.2 trillion deposits at the Fed to invest in Treasury securities, including T-bills, which are close substitutes for interest-bearing reserves. Money market funds may also transition their USD1.4 trillion reverse repos into purchasing T-bills. This collective action could generate significant demand, amounting to USD4 trillion, for short-term Treasury securities. These factors collectively suggest a potential for lower yields and higher prices for short-term Treasury securities.

For traders looking to capitalize on these dynamics, a steepening trade strategy could be considered. This involves shorting the 10-year T-note futures while simultaneously going long on the 2-year T-note futures. This strategy leverages the anticipated yield curve dynamics resulting from the factors discussed. Readers interested in pursuing this strategy can find more information on how to create duration-neutral contract sizes here.

In conclusion, the recent surge in bond yields is not simply a consequence of the Fed signaling a "higher for longer" interest rate stance. It is, in fact, a complex interplay of factors, including expectations of interest rate hikes and term premiums. Understanding these dynamics and their historical context is crucial for making informed investment decisions in the Treasury market. As we navigate these uncertain financial waters, being mindful of the term premium and its potential for mean reversion provides valuable insight into the future trajectory of bond yields and their implications for investors and traders alike.

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Justin

Central Bank

Economic

Liquidity in the European government bond market has returned to levels from before the Covid-19 pandemic, but it could be improved further. The biggest barrier to this is the heavy regulation and balance sheet constraints that have been imposed on financial institutions since the financial crisis of 2008.

Liquidity was a central topic of discussion at the European sovereign, supranational and agency forum hosted by OMFIF’s Sovereign Debt Institute in Luxembourg. This exclusive event brought together leading European sovereign debt management offices and issuers, along with banks, investors and other market participants, to discuss the key issues facing this market.

One head of a western European debt management office said at the forum that liquidity levels were back to around 2019 levels, but the regulation of banks was a key factor in hindering even stronger liquidity conditions in the European government bond market. He said that, while greater regulation in the wake of the financial crisis had ‘brought a lot more solidity to the banking system’, it had also ‘moved part of the risk from the banking system and intermediaries to the markets’, which has affected the level of liquidity.

‘In this respect, an analysis of how some of these regulations should be adjusted is probably worth looking at,’ he added.

Bankers at the forum echoed the impact of bank regulation on the ability to provide strong levels of liquidity in the European government bond market.

‘If you look at the growth of the European debt markets, in particular the government bond market, we’re talking about 130% since the financial crisis,’ said a head of SSA debt capital markets. ‘That is basically an average growth rate of 7% per year. At the same time, the collective balance sheet that is committed to trading this debt has, at best, remained constant but in many cases, it has actually declined.’

An SSA debt capital markets head said regulation was the reason liquidity provisions from balance sheets had not kept up with the growth of the European government bond market, highlighting the leverage ratio of banks. ‘The most painful is the leverage ratio, which is a very crude measure that does not differentiate between the riskiness of your assets on the book,’ he said.

It does seem odd that, as a business opportunity grows, banks are being forced to cut back on their ability to take advantage of it. This has particularly affected banks with smaller balance sheets, causing them to quit their roles as primary dealers. ‘Overall, the cost of regulation and complying with regulation has set a very high barrier for small institutions to be active,’ said the banker. ‘Trading government bonds is not profitable enough for them anymore’.

Another DCM official echoed these concerns. ‘Warehousing is becoming a lot more expensive. Regulation is really becoming a problem for us, whether it’s the leverage ratio or incremental risk capital models that are being introduced,’ he said.

As a result, banks are stuck between trying to serve both regulators and issuers. ‘We find a disconnect between our clients at the DMOs asking us to provide more liquidity but, on the flip side, the regulators are putting more costs on providing that liquidity,’ said the DCM official.

Another option to overhaul the regulation of banks is to allow non-banks, such as hedge funds and fast money accounts, to enter the European government bond market as primary dealers. In a poll of attendees at the OMFIF forum, 70% said this was a good idea to boost liquidity in the market.

Currently, only financial institutions with a banking licence can act as primary dealers in the European government bond market. However, hedge funds have been boosting their involvement with the US Treasury market since the financial crisis as traditional banks have pulled back due to heavy regulation. Hedge funds are now an essential part of the US Treasury market in providing prices and market-making activities. The European government bond market could take note.

Source:Burhan Khadbai

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Alex

Political

"There has to be an adult in the room," declared House Speaker Kevin McCarthy, explaining why he finally decided to ignore the handful of extremists within his Republican House of Representatives caucus and partner with Democrats to continue to fund the U.S. government for another 45 days.

Republicans were going to face a huge blowback for an unnecessary shutdown because a small group of them simply would not agree with anyone, or even each other, about what they wanted. Their endless grievances changed daily. It was, as I noted in these pages last week, a government shut down over nothing.

Such a total meltdown within Republican ranks, would undermine claims that the House should remain in Republican hands, let alone the Senate or the White House.

Mr McCarthy, and almost all Republicans, are aware that historically the party forcing the shutdown has paid the political price. As Representative Patrick T McHenry of North Carolina, a staunch ally of the Speaker, explained with evident exasperation: "It's been tried before."

The extremists, however, were utterly unmoved. While Democrats naturally spun the 45-day funding extension as a victory, Republican extremists painted it as a pathetic cave-in by Mr McCarthy and most other Republicans, and a victory for the "uni-party", which they claim unites other Republicans and all Democrats in a de facto coalition representing the wealthy and elites.

The Republican extremist fringe was so outraged that they've decided the Speaker hast to go. It's a confrontation they've been longing for.

Mr McCarthy agreed that any individual House member could bring a "motion to vacate", which could remove him from the Speaker's chair. One of his most voluble detractors, Representative Matt Gaetz of Florida, has vowed to do just that. Yet party establishment figures and their media allies are now asking if Mr Gaetz is secretly working for the Democratic Party.

The most substantive issue in this sorry spectacle is increased aid to Ukraine, which is anathema to pro-Moscow Republicans. Mr Gaetz accused Mr McCarthy of making a secret deal with Democrats for additional aid for Ukraine in the near future, which the Speaker flatly denies. But this strongly pro-Russia sentiment among Maga Republicans is why Mr McCarthy inexcusably barred Ukrainian President Volodymyr Zelenskyy from addressing the House last month. Yet most Republicans, even in the House, and certainly in the Senate, and the overwhelming majority of Democrats favour the funding that the Biden administration has prepared to provide to Ukraine.

The 45-day stopgap spending bill is an obvious victory for U.S. President Joe Biden and the Democrats and seems to usher Mr McCarthy into the realm of governance-minded American leaders, aka "the adults". The conclusion is unmistakable: not only did he find it impossible to work with the radical fringe of the Republicans, but he also ultimately preferred to partner with Democrats to keep the government funded and prevent the Republican Party from incurring yet another brutal self-inflicted wound.

The outcome raises two important questions. Can Mr McCarthy remain in power? And what will happen in 45 days when the stopgap spending measure expires?

If Mr McCarthy remains Speaker, he has a solid coalition of Democrats and Republicans that do not wish to see a shutdown in 45 days or at any other time. But preventing a replay of the bizarre near-miss last week depends on a Republican Speaker being willing to partner with Democrats in passing rational spending bills acceptable to the Senate and the White House.

Mr McCarthy will effectively be at the mercy of Democrats if the extremists present a motion to vacate. Democrats might vote to keep him in place in order to repeat avoiding a shutdown when the next deadline approaches. However, Mr McCarthy has caved to the extreme right at every stage, including recently launching a baseless impeachment inquiry into Mr Biden. So, there are ample reasons for Democrats to relish watching him suffer the disaster he allowed to be baked into his, from their perspective, corrupted at birth, speakership.

But the national interest, and the agenda of the administration, militates towards keeping Mr McCarthy in place, rather than allowing the extremists to oust him and sending the House into even greater chaos. Nonetheless, Mr McCarthy may be even more disliked by most Democrats than his internal Republican opposition. So, even if Mr Biden pushes for it, as he likely will, it might be difficult for House minority leader Hakeem Jefferies to get Democrats to support Mr McCarthy even if that's what the party hierarchy decides it wants.

But even if Mr McCarthy remains in place, with an overwhelming majority of Republicans and Democrats who wish to see the U.S. government continue to function without a shutdown, nonetheless the biggest bone of contention remains aid to Ukraine. That's categorically opposed by the proto-fascist Maga Republicans, plus a handful of neo-isolationist leftist Democrats and Republican libertarians who oppose almost all U.S. international engagement.

Both parties, particularly Republicans, walked right to the edge of a shutdown last week but ultimately concluded they wanted no part of it because of the political consequences, not to mention the national interest involved. The U.S. economy has recovered to an amazing extent, but most credible economists agree that the recovery is fragile. The country simply cannot afford a shutdown at this crucial stage, which could, especially if it were protracted, send the whole economy into a tailspin and ruin a remarkable comeback.

Do the Republican extremists really deliberately intend to sabotage the national economy for political purposes, either to attack their own party leadership and/or try to bring down Mr Biden and help their hero, Donald Trump? Alas, even such cynical machinations may be beyond the infantile calculations of these nihilistic radicals, who simply seem bent on pointlessly defying everyone else and demagoguing in their own personal interests as much as possible.

Thus, the most likely scenario going forward is that Mr McCarthy will remain Speaker with some Democratic support to defend the coalition that prevented the absurd Seinfeld-like "shut down over nothing" and keep the status quo alive in the interest of both the Republican Party establishment, and Mr McCarthy, as well as Mr Biden, the White House, and, ironically, the President's re-election bid. The old adage holds that "politics makes strange bedfellows". But it becomes even stranger when the strangest characters make a plausible, narrowly averted bid to take over America's national political theatre.

Source: The National News

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Damon

Bond

Economic

The world's biggest bond markets are in the throes of another rout as a new era of higher for longer interest rates takes hold.

In the U.S. Treasury market, the bedrock of the global financial system, 10-year bond yields have shot up to 16-year highs. In Germany, they touched their highest since the 2011-euro zone debt crisis. Even in Japan, where official rates are still below 0 per cent, bond yields are back at levels seen in 2013.

Because government borrowing costs influence everything from mortgage rates for homeowners to loan rates for corporates, there's plenty of reason for angst.

Here's a look at why the bond rout matters.

Why are global bond yields rising?

Markets are increasingly reckoning with interest rates staying high.

With inflation excluding food and energy prices elevated and the U.S. economy resilient, central banks are pushing back against rate cut bets.

Traders now see the Fed cutting rates to only 4.7 per cent from 5.25 per cent-5.50 per cent currently, up from the 4.3 per cent they anticipated in late August.

That's compounding worries about the fiscal outlook following August's Fitch U.S. rating downgrade citing high deficit levels. Highly-indebted Italy raised its deficit target last week.

Higher deficits mean more bond sales just as central banks offload their vast holdings, so longer-dated yields are rising as investors demand more compensation.

Many investors were also betting bond yields would drop, so are extra sensitive to moves in the opposite direction, analysts say.

How far could the selloff go?

U.S. data remains resilient with Monday's upbeat manufacturing survey pushing Treasury yields up again.

That is no surprise, and analysts do not rule out a rise in 10-year Treasury yields to 5 per cent, from 4.7 per cent now.

When a bond yield rises, its price falls.

But Europe's economy has deteriorated, so selling should be more limited there, as bonds typically do better when an economy weakens, and most big central banks have signalled they are done with rate increases.

Germany's 10-year yield, at 2.9 per cent, could soon hit 3 per cent - another milestone considering yields were below 0 per cent in early 2022.

Why does it matter and should we worry?

U.S. 10-year Treasury yields have risen to their 230-year average for the first time since 2007, Deutsche Bank data shows, highlighting the challenge of adjusting to higher rates.

Bond yields determine governments' funding costs, so the longer they stay high, the more they feed into the interest costs countries pay.

That's bad news as government funding needs remain high. In Europe, slowing economies will limit how much governments can unwind fiscal support.

But higher yields are welcome to central bankers, doing some of their work for them by raising market borrowing costs.

U.S. financial conditions are at their most restrictive in nearly a year, a closely-watched Goldman Sachs index shows.

What does it mean for global markets?

The ripple effects are broad.

First, rising yields set the stage for a third straight year of losses on global government bonds, hurting investors long betting on a turnaround.

As for equities, the bond yield surge is starting to suck money away from buoyant markets. The S&P 500 is down roughly 7.5 per cent from more than one-year peaks hit in July.

Focus could turn back to banks, big holders of government bonds sitting on unrealised losses, a risk put on the radar by Silicon Valley Bank's March collapse.

"(The bond selloff) will have a strong impact on banks that hold long end Treasuries," said Mahmood Pradhan, head of macro at Amundi Investment Institute. "The longer it persists the more sectors it will hit."

Higher U.S. yields also mean an ever stronger dollar, piling pressure on other currencies, especially Japan's yen.

Should emerging markets be worried?

Yes. Rising global yields have ramped up the pressure on emerging markets, especially higher-yielding riskier economies.

The additional yield junk-rated governments pay on their hard-currency debt on top of safe-haven U.S. Treasuries has risen to over 800 basis points, according to JPMorgan, more than 70 bps higher from their Aug. 1 trough. "The intensification of the higher-for-longer narrative, along with the rise in oil prices, has also been the primary driver of broad U.S. dollar strength," said Andrea Kiguel, head of FX and EM macro strategy, Americas at Barclays.

"The speed of the move has lead to weaker currencies within the region, a violent sell-off in local rates and wider EM credit spreads."