TreasSec Bessent gives a preview of the press conference later today

Outlook

TreasSec Bessent gives a preview of the press conference later today with Trumpian bombast in the FT: "At dawn begins an economic D-Day, the single greatest financial offensive ever marshalled against an adversary.

“Our objective is to sever every economic lifeline that sustains the tyrannical regime until Tehran stands alone…. [the US military has} "significantly dismantled Iran's military capabilities and weakened its nuclear programme. Now we are entering endgame."  The “rial has never been weaker and inflation has rarely been higher.”

"The regime’s final refuge now lies in the self-deception of fearful nations that still believe accommodating aggression can secure a durable peace. Those who sever Iran’s remaining financial and commercial connectivity will reinvigorate their own. They will deepen their access to global capital, reinforce confidence in their markets and attain the standing they seek in the world economy."

This is a direct threat to any country continuing to trade with Iran, pirate or otherwise. China and India have yet to respond. This is a call for solidarity by what used to be a world leader who lost that power by denigrating allies and dismissing international law.

The bond crisis is getting a ton of fancy commentary. One idea is that the TreasSec is just trying to improve liquidity. We read a lot about disorderly conditions in the market where one set of data got suddenly contradicted by actual purchases and sales. We can’t judge how much of this is true but irrelevant. The bottom line is still sentiment that points to inflation, even if falling a bit these days, is still too high and not being addressed directly by the Fed.

This brings us to the “bear steepener.” That’s when the short end of the yield curve is high and rising but the longer end is falling, if only a little, due to Treasury intervention. As noted before, the size of the intervention is a tiny fraction of the total market, and hasn’t worked so far, anyway. Besides, which yield curve? We have a slew of monthlies vs. a slew of annuals starting at 1 month and going to 30 years.

The conventional 2/10 curve shows steepening to a 52-week high, meaning  worries about the longer-term outlook are stronger than for the shorter-term. These worries include a judgment that inflation is not being handled well—and neither is the debt. Two things: first is hard evidence that confidence in the Institutions is falling. That’s the Fed and the Treasury, but wider out, the White House.

As we note all too often these days, institutional; factors have the power to outweigh anything economic. Institutions are failing on two big fronts now, on top of the Trumpian disregard for a third institution, the Constitutional and the Law.

Second, a rising yield curve is, counter-intuitively, bad for the dollar. It means the extra premium needed to induce dollar buyers is rising. Currency markets have shown a preference over decades for the short-term. When Fed funds up to the 2-year are on the rise, the dollar thrives in the short run.

When we have the 10-year rising but the dollar index falling, as we see today since the spring, it means worries about inflation and fiscal risk are stronger than the yield. State Steet and the St. Louis Fed have written about this anomaly.

We couldn’t find a longer-term case study of when we had this divergence before but remember we saw it during Covid and again in 2025.

And see the chart showing the 10-year yield and dollar index on a weekly basis starting in 2004. The first break seems to come in August 2013. A list of events then is not convincing. We had a flash freeze in Nasdaq trading due to a computer glitch. The economy was strong even if jobs were weak and the Fed was expected to cut. Maybe it was fiscal austerity, named the sequester, passed in 2011 but starting to hit. We’d go look up our morning reports from that month but they are on a half-dead old desktop and Microsoft is too big an ogre for a weekend.

Note that all the articles on bear steepening or yield/dollar inverse correlation name debt/fiscal worries as a factor. This is not new. The US has just been getting away with it for so long that it has tended to get lost in the shuffle. Something that is relatively new is that about half of the cumulative debt burden is interest expense. See the chart from The Economist.

We don’t know if this time the chickens are coming home to roost. The US has been getting away with it for so long. And sorry, gold bugs and crypto fans, yield is better than no yields.

Forecast

Mr. Bessent has two impossible tasks today—define the dreadful economic consequences the US is going to being down on Iran that haven’t already been tried, and fix the bond market.

In the Iran case, the big worry is that whatever the US declares, Iran starts hitting ships in the Strait again, choking off what is getting through in the dark (which is surprisingly a lot). That would mean oil prices back up, and inflation down the road with it. It would also signal that Trump lies when he says the US controls the Strait. Since it’s US military accompanying the dark fleet hugging the Omani coast, Iran would have to hit US ships as well as tankers. This does not bode well.  

In the bond market case, jitters can be fixed by only two things that are real and one that is a stop-gap. First would be some jiggery-pokery with the budget to make it appear more manageable. Second would be Mr. Warsh saying out loud he favors a rate hike. Third would be the classic Trump bullying of the parties at fault with threats of losing licenses and the like. See the table above of the US institutions that hold bonds. Can they be cowed? Yeah, probably, but not the individuals and the foreign holders.

Bloomberg makes the point that defying Trump is a new thing--Iran, the bond market and Canada. This is likely to infuriate and therefore cause a shock intended to distract from left field. We joke it would grabbing Greenland but that’s becoming less of a joke by the day.

The “sell America” movement, or rather the “sell Trump” movement, always has limits. It can flatten out for a while and then resume or reverse. Nobody has a magic wand to fix the debt problem. We will get whipsawing when he discloses the plan later today. We already see the yields retreating a bit and they can easily retreat some more, which is nice for the dollar in the short run. The markets want to believe Bessent can fix things. Nobody has the stomach for a crisis. We expect a pullback over the next few days in yields and an accompanying improvement in the dollar, which has already hit a 3-month low. Wishful thinking rules.

What about the longer run? Stay tuned. Oil prices are down a bit and what happens next in the Strait is central to the inflation outlook.

But the probability of long yields falling convincingly for a prolonged time and/or the dollar rising convincingly are very, very small.

Unfortunately that means we really need giant stop-losses and we are cowardly about that.