Shortening debt issuance is the functional equivalent to QE, and QE is unambiguously a yield curve steepener (but ambiguously bond bearish).

This seems counterintuitive (there is less long-term debt?) but respect (1) Say's law and (2) it might increase the primary deficit.

1/ 2/ First up I don't consider shortening debt issuance to be a concern. The US government doesn't have refinancing risk like a corp does, so it's purely a choice on the economics. Fade the doomers.

The risk lies in the fiscal deficit.

MUTUALLY ASSURED ECONOMIC DESTRUCTION

Large-scale tariffs are the "big red button" that closes the US capital account off to the world.

The US has had to mirror China's closed capital account to protect itself from a system so good at giving it what free markets want.

1/ 2/ This new economic Cold War didn't start with tariffs, but in 2015.

This was when China decided to abandon its long-term goals of being a more open player in global markets, opting instead to avoid recession through debt accumulation/investment.

The US danced as well...

The US steepener is still the trade that keeps on giving for 1 fundamental reason:

The market keeps on underestimating US nominal GDP growth!

SOFR Jun-26 is back to end-March levels and yet:

1. Z6 - 10Y curve is 25bp steeper
2. 2s10s is 20bp steeper

Plenty to go

1/ 2/ Yes, each of these curves is roughly 20bp from their highs at the worst of the basis trade unwind in mid-April, but the now normalised levels show the step change in repricing after spending way too long inverted during the inflation panic

A Japanese trade deal including Yen appreciation is a good deal for Japan - as long as the US (and even better, its other major trading partners) stand strong on Chinese tariffs.

The biggest downside to devaluation is that you relatively impoverish your citizens globally...

1/ 2/ ...for the sole benefit of protecting your export sector.

I've spoken at lengths about the CNY/JPY cross which only broke its support just after April 2.

Wow, bonds really suck. It's over for them as a useful balancer to equities.

Main problem for them is
> the deflation tail is chopped off, so extreme easing is less likely than ever
> the economy isn't in a de-leveraging cycle so reals can't rally either

1/ 2/ The yield curve continues to be far too flat for the current balance between growth and inflation risks, even after the tariff bombshell.

So, the Z6-10y curve keeps steepening no matter if we rally of sell-off. 2s10s back to uptrend.

I wrote a piece a while back about how it is intervention and the vol crushing behaviour of governments and central banks (which we continually vote for) that makes asset prices as high as they are.

Well, voters have had enough of that idea in the US. Uncertainty wins.

1/ 2/ The link to it is here.

macroisdead.com/p/low-interest…

China, despite dominating export markets and being the world's biggest external saver, still racks up roughly $4.5trn (that's dollars, by the way) of new debt every year.

That's 16% of the size of the US economy, every year.

This doesn't scream healthy.

1/

https://twitter.com/mattyglesias/status/1906690265932284071

2/ Here is the bank loan only comparison. Keep in mind China's economy is 2/3's that of the US.

Including govt debt, the US adds around $200bn/mo in new debt compared to about $375bn/mo for China.

HOW CAN US GROWTH SLOW WITH SO MUCH NEW DEBT?

I update my US growth model, forecasting acceleration.

Govt debt growth isn't slowing, and private debt explodes in 2025.

I first published this model Nov 9, 2023 during a 10% drawdown, forecasting >5% NGDP growth. I was right.

1/ 2/ The model estimates nominal US GDP growth from the total amount of public and private debt accumulation (nGDP y-axis here).

Errors aren't tiny, but it does do a good job to convert contraction in debt with recession.

I've updated for 2024 (arrow), close to forecast.

Euro rates breakdown

10y Bund approaching cycle highs in a vicious "not seen since" type move

But there's so much more

1 year steepening trend has accelerated
X-mkt with the US has violently mean reverted
<2y Euribor approaching hikes been priced
Peripheral calm
1/ 2/ Curve steepening started as ECB cuts were starting to be priced. This says a lot on its own

Now the curve is even breaking into the region occupied during ZIRP/NIRP...this is important because curve steepness should be greatest during ZIRP!

Key market themes are driving dispersion

- Stagflation?
- Europe optimism
- Earnings punishment
- Tariff/DOGE/uncertainty
- Short vol/US equity/old tricks aren't working

Short-term narratives matter but these are correlated and are appearing DUE to price action. Careful.

1/ 2/ All of these themes are playing with 3 trades:

Trade 1: US bond outperformance...

Year-end marked the top in bond weakness of the US over Germany. This spread was historically wide if you leave out negative ECB rates of '18/'19

X-mkt trades mean revert when you least expect

Another day, another high in JGB yields

A very strong theme throughout the 2010s was the "Japanification" of Europe and the decade long compression of EU-JP yields until negative rates inverted the spread

Has another multi-year trend started?

[EU-JP 10y yields below]

1/ 2/ The driver this time has been more even - bund yields have been falling while JGB yields have been rising

Previously the narrative was that Europe would look like Japan (borderline deflation and low growth) but now its based on Japan escaping that cycle

"The EU, with Germany at its industrial core, boasts 30 million manufacturing jobs: almost twice as many as the US had before the first China shock."

This is a great high-level piece.

Globally debt-funded excess capacity is consumed with debt-funded consumption. Dangerous.

1/

https://twitter.com/Brad_Setser/status/1879917884673286414

2/ This makes me panic. Germany ostensibly has no way out of this predicament, a result of years of belief that relying on the consumption of others was morally virtuous (see all the interaction with the Greeks).

After 2 1/2 years of inversion hell the front-end of the US yield curve is positively sloped.

This is a return to normalcy - gone are the days of recession-casting and hard landings.

This is HORRIBLE for the 10y. The sell-off is too slow given front-end curve dynamics.

1/ 2/ 2s10s has continued to steepen towards my 4 month old target of 74bp.

I think we move there, but faster given the dynamics in the front end of the curve.

Where my substack got it right or wrong, 2024 edition.

Hopefully you can find something in here to read over the holidays.

First up...why bonds suck.

1/ 2/ Running a macro newsletter suggesting individual trades is a full-time job. Execution is as important as ideas which means running a "trades on a platter" newsletter is just the same as running an actual portfolio, and I'd rather do that.

A low EU unemployment rate is hiding horror show productivity growth which is pinning growth at zero.

Any more retrenchment from the private sector (which is getting ravaged in manufacturing) and growth will be negative before you know it...

1/

https://twitter.com/BobEUnlimited/status/1867050055301050502

2/ This is replicated everywhere in the western world apart from the US as government has led hitting and kept unemployment rates where they are

You can't look at euro data through a US lens, the drivers are just so different

Chinese statements yesterday were more direct (and from Xi's mouth, meaningful) than anything that happened during the "Tepper storm"

Watch the behaviour of steel products (rebar here) this time around on a relative basis to equities to gauge probability of true household stimmy

1/ 2/ Last time CSI300/HSI rallied just over 30% from after the first comments (not after rumours started), while rebar was up ~20%

This was your gut reaction jump using 2015 as your mega sized stimulus template

Dec '24/'25 Fed Funds is back to where it was before ZIRP redux madness started in the 1H!

Reaching 170bp of cuts in 2025, we now sit at only 70bp, not even 3 cuts in 8 meetings.

Short-end is as cheap as it ever has been in the post 2022 "new world"...

1/ 2/ ... as long as you think the Fed stays in a cutting cycle.

That end 2025 point is just under 4% now, compared to 3.5% well before the Fed started with that 50bp cut

Buy the rumour, sell the fact is still king

LOW UNEMPLOYMENT IS A MIRAGE

When low unemployment is enabled by low productivity government jobs, GDP growth is sacrificed to an extent that recession is a small step away even at full employment.

Labor force growth becomes the only GDP driver. A bad mix.

1/ 2/ The gap in performance of GDP per capita across developed nations has been stark. Most are in per capita recessions.

I've written a lot about the power of US fiscal policy as a driver for growth, but this isn't even the main reason for per capita outperformance.

US 3Q GDP - banger headline with weakening composition

Nom: +4.6% 🔽
Real: +2.83% 🔽
Real ex Exp/Inv: +3.56% 🔼
_______
PCE: +2.46% 🔼
Govt: +0.85% 🔼
Res I: -0.21% 🔽
Biz I: 0.46%

Absolutely no recession signal, but detracting resi investment being offset by govt a concern

1/ 2/ The US is still a 3% real, 5% nominal economy.

Consumption, the largest component, has continued to trend up from the fiscal hole of 2022.

The current economy will perform in-line with the 10y average (dotted line). This is your base for real GDP growth.

TRUMP and the narrative for the 10y bond

In eco terms MAGA summarized:
- Trade deficit is too big, make it smaller
- Govt spending is too big, make it smaller
- US should lead in eco growth, so cut taxes to keep budget deficit and hope lighter regs help

Yields up or down?

1/ 2/ Taking the total of all the election promises I think these 3 points summarize the bulk of the rhetoric from Trump and the crew around him.

Base case unchanged policy was that long rates are too low & the curve is too flat. This is explained below.

macroisdead.com/p/as-a-portfol…

Despite the presence of skyrocketing govt debt charts, average "new money" growth continues to moderate from the heady days of 2022/23.

Oct actually shows a contraction in new debt.

Model still pointing to more downside vol in the S&P.

1/ 2/ Moving average should balance out to about $150bn/month eventually, but the latest print has caused a downturn in the indicator.