A Republican sweep is sending bond markets on fire.

Here is what's happening:

1/ Yields are higher across the curve, but long-end yields are leading the charge.

This yield curve movement is known as ''Bear Steepening''.

Bear steepening is consistent with two possible macro scenarios:

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Bond Market 101.

Use this simple approach to master the Bond Market.

1/ Nominal bond yields can be thought of as the interaction between:

1️⃣ Growth expectations
2️⃣ Inflation expectations
3️⃣ Term premium

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US elections are approaching.

And the bond market is sending important messages.

Thread.

1/ Both candidates foresee persistent fiscal deficits and Trump's policies are seen as more stimulative for growth and inflation.

Bond markets are in fibrillation.

10-year Treasury yields have rapidly increased to 4.25%.

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The biggest macro event of the week happens Saturday.

Here is what you need to know about the Chinese ''fiscal'' press conference:

1/ Chinese policymakers are applying a Western-like playbook here.

Lift the stock market at all costs.
And hope that's enough to loosen financial conditions and rescue the Chinese economy.

But there is a problem with that.

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This week, Chinese policymakers fired a ''bazooka'' of stimulus measures to revive the economy.

But: is it really a bazooka? Will it be effective?
Let's unpack it together.

1/ The Chinese real estate market is de-leveraging very hard.

Economists estimate Chinese households have suffered $10+ trillion of wealth losses as a result.

There is now a strong urge to stop the bleeding.

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The bond market is intimidating: it's full of jargon and practitioners tend to overcomplicate it.

Today, let me share with you my Bond Market 101 approach.

It will help you understand bond markets in <5 minutes.

1/ Here is the key concept.

Nominal bond yields can be thought of as the interaction between:

1️⃣ Growth expectations
2️⃣ Inflation expectations
3️⃣ Term premium

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Everybody and their dogs are talking about the Fed.

But once again, the real macro action is going on somewhere else.

The situation in China keeps getting worse.

1/ The Chinese economy keeps imploding from within.
And we should pay attention.

The Property Price Index for Chinese tier-1 cities keeps making new lows, and it’s now approaching levels last seen 8 years ago!

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Government and Central Banks will flood markets with fiscal and monetary policy over the next decade.

Mastering monetary plumbing is now a necessary skill to become a better investor.

A quick guide to Monetary Mechanics.
Thread 1/ For decades, authorities have been wary of using strategies like Fiscal Deficits + QE together.

For example, between 2015-2019 Europe has delivered large amounts of QE but governments were called to reduce deficit spending at the same time.

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Here are 5 visuals showing the colossal demise of the European economy.

Thread.

1/ Let's start with Germany.

A business model built on cheap energy imports and outsourced manufacturing which isn't working anymore:

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Here we are.

After a prolonged inversion, the US yield curve just dis-inverted.

Here is why it matters.

Thread 1/ Many are familiar with the yield curve slope as the predictor of recessions: the track record is almost perfect, and there are good reasons why.

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Here are some staggering statistics about the US economy - since mid-2020:

1) US nominal GDP has grown by ~7 trillion
2) US total debt has grown by ~8.5 trillion

Debt-fueled economy, debt-fueled growth.
Thread 1/ Look at this excellent chart from E.J. Antoni.

It shows how US nominal growth (blue) has increased less than the increase in federal government debt (red).

If you add in private sector debt, the red bar crosses the 8 trillion mark.

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This picture is a great visualization for how our monetary system works.

Your house price in $$$ keeps going up.
Your house price measured in Gold does not.

Here is how it works:
1/ In 1929, the average US house price was around $6k.
10 kg of Gold were worth $7k - enough to buy you the average house in the US

In 2024, the average US house price is around $500k.
10kg of Gold are worth more than $800k - more than enough to buy you the average US house

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There is a huge macro theme unfolding under our eyes.

Yet almost nobody is paying attention.

Big things are going on in China.

1/ Let's take a step back.

China joined the WTO in the early 2000s and benefitted from a wider access to global markets where they could leverage their internal competitiveness (read: low salaries) to gain shares – and they did.

But the inevitable demographics decline...

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It's not the yield curve inversion investors should worry about.

It's the late-cycle bull steepening which is unfolding right now.

Thread.

1/ We have all heard that yield curve inversions tend to precede recessions.

Yet this analysis doesn't help unless you include the following context:

- The sequencing and the macro lags;
- The last shoe to fall: the late-cycle steepening!

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The Bank of Japan did it again.

Japanese yields are on the rise, and the Japanese Yen is strengthening.

Here is what you need to know.

1/ At their July meeting, the Bank of Japan decided to raise interest rates again.

The short-term policy range in Japan is now around 0.25%.

On top of it, the BoJ will significantly cut their purchases of Japanese government bonds over the next two years.

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Yield Curve 101.

A Primer on how the yield curve works.

Thread.

1/ When the yield curve flattens and eventually inverts, you notice.

But it’s when a recession hits, the Fed cuts rates and the curve steepens that you become you have to worry.

Yield curve dynamics represent a crucial macro variable to understand.

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The Canadian economy is in trouble.

Thread.

1/ Central Banks hikes can be very punitive if an economy has:

- High levels of private sector debt
- A high share of floating rate mortgages and corporate loans/bonds
- A high share of short-term reset mortgages and loans
- Big refinancing cliffs

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The Fed hiked rates above 5%, and yet the US economy hasn't broken yet.

Here is why.

Thread.

1/ High interest rates are supposed to break something because an overly indebted economy will have to service a mountain of debt at expensive rates and it will have less money for income and spending.

The problem is that people are looking at the ''wrong'' debt.

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Liquidity is one of the most important drivers for markets.

But what is liquidity?
How do we measure and track it?

Thread.

1/ ''Liquidity'' is the most abused word in macro and markets.

People use it to justify every market move, and yet they never explain what it ACTUALLY is.

And you often see misleading charts like this:

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One day, the US Dollar will lose its global reserve currency status.

And it's going to be a huge event.

But here is some hard truth about the De-Dollarization.

1/ The big question is ''when''.

And the answer is: most likely not within any tradable horizon!

Here is why an orderly de-dollarization is nothing more than a fairytale.

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Macro fragilities are showing up outside the US.

Thread.

1/ High interest rates are supposed to break something because an overly indebted economy will have to service a mountain of debt at expensive rates and consumption will slow.

High rates were supposed to break the US because of government debt, but that's not how it works.

2/