Treasury pulls a FAST one and doubles long-end buybacks, temporary technical relief

Well, good morning, SURPRISE! I guess Scotty heard the bond market screaming.

After watching the 30-year yield surge above 5.30% and the 10-year push deeper into the “danger zone,” the treasury blinked.

In a surprise announcement yesterday morning – minutes ahead of the opening, Bessent announced that the treasury will double the size of its liquidity-support buybacks in the 10- to 30-year part of the curve beginning September 9. That announcement caused the bond market to rally and stock futures went from negative to positive.

Before you could even blink – the 30-yr yield dropped about 10 bps to 5.18%, the 10-year backed off toward 4.65%, the dollar fell to a three-month low and gold exploded higher gaining $190 or 4.35% blasting up and thru the $4,500 target we identified last week.

So, it’s all good now? Well, before you go and pop the champagne – let’s look at what really happened -

Scotty - didn’t solve anything – all he did was intervene in the bond market – creating artificial demand - removing some long duration from the market, pushing bond prices higher and temporarily forcing yields lower.

But it doesn’t really ‘do’ anything…it doesn’t reduce the deficit. It doesn’t reduce the nearly $40 trillion national debt. It doesn’t reduce the government’s exploding interest expense, and it doesn’t eliminate the trillions of dollars we need to refinance and issue.

Ok, let’s talk about this. If Treasury finances these purchases by issuing more short-term T-bills, then what we’re really talking about is another version of Operation Twist -removing long duration from the market and replacing it with shorter-duration debt. And look—it can work. By temporarily changing the supply/demand dynamics of the treasury market, it can pressure long-term yields lower.

But temporarily is the operative word.

It cannot permanently hold long-term yields below the natural level justified by inflation, growth and the country’s fiscal fundamentals.

And here’s the other thing - it works best when the economic backdrop is weak growth, inflation is subdued and we have control of fiscal/monetary policies….

And that’s the key – because today that is NOT the backdrop – we have enormous financing requirements, we have enormous deficits and we have stubborn inflation and the risk that it gets worse, we have oil trading in the $80’s and we have bond investors ‘demanding’ higher yields – so while Scotty can temporarily change the tone, he cannot change the reasons why investors are demanding more.

And guess what - This morning, the bond market is already testing him. That rally at the long end of the curve has started to fade. Bonds are under pressure again and yields are moving back up as everyone realizes that yesterday’s intervention may have changed the technical picture but not the fundamental one. The 10 yr is up 2 bps at 4.67% while the 30 yr is up 3 bps yielding 5.22%.

And then we still have the middle east problem…. Iran – refusing to cooperate and oil refusing to back off. Brent is up $2 at $93.60 this morning and WTI is up $2 at $87.80… as the conflict continues to pressure global energy markets. So, understand this - while Scotty is trying to push long-term borrowing costs DOWN, rising oil is threatening to keep inflation expectations and long-term yields UP.

See the problem? Bessent can lean into the long end. He can change the maturity profile and remove some duration from the market. But he can’t manufacture lower inflation. He can’t manufacture fiscal discipline. And he can’t force global investors to finance our debt at a price or a yield they don’t like.

I said it yesterday — there is an enormous amount of debt issuance coming to market, both government and corporate. Think enormous supply. And ultimately, that supply meets demand at some clearing price determined by the markets.

So, yes, the treasury can temporarily influence that price by stepping into the market as a buyer, but it cannot eliminate the basic laws of supply and demand. At some point, the natural buyers – think pension funds, insurance companies, banks, asset managers, foreign governments and individual investors - have to look at a 10-, 20- or 30-year Treasury and say it works or it doesn’t. If they do – great and if they don’t then bond prices fall and yields rise until they do. It’s basic economics – the law of supply and demand and no amount of artificial demand can permanently change it.

Which is why the real solutions are - lower inflation, slower growth, a resolution to the Iran/oil crisis and ultimately fiscal discipline in DC. Until then, the treasury may be able to temporarily affect price and yield - But this morning’s reversal tells you that the bond market isn’t surrendering – and that is important.

Ok – now stocks liked that move and after 3 days of losses stocks ended higher – but were well off their intraday highs…The Dow gained 120 pts, the S&P’s up 16, the Nasdaq gained 41, the Russell added 15 pts, the Transports lost 35 pts, the Equal Weight S&P added 92 pts while the Mag 7 added 424 pts.

So yes, stocks rallied. But let’s not get carried away. The move wasn’t exactly a screaming vote of confidence. Yes we saw strength in Consumer Staples, Consumer Discretionary, Healthcare (thanks to MRK/MRNA news), Basic Materials and Real Estate, but tech and the semi’s are still coming under pressure – as the algo’s continue to take money out of the most crowded trade on the planet. Again this suggests more rotation and not liquidation.

And that matters because the semi trade got crowded and once sellers started heading for the exits, they started tripping over one another because valuations matter, positioning matters and even a great long-term investment theme can experience a nasty short-term correction. Remember yesterday’s ‘theme’ vs. ‘calculus’ conversation.

And next week it’s NVDA’s turn to ‘wow’ the crowd on what they think AI spending and demand looks like. Make no mistake -the street expects Jensen to deliver another monster quarter, with revenues approaching $92–94 billion, nearly double last year. But here’s the problem: everyone already expects it.

At this point, NVDA doesn’t just have to beat the numbers - it has to beat the whisper, it has to raise the outlook and convince investors that the hundreds of billions being poured into AI infrastructure aren’t slowing down. Good won’t be good enough. Even great may not be good enough. Jensen needs to WOW us. The options market is pricing in a 7% or $15 ish move in either direction depending on what he says…. We’re in this $195/$240 trading range…. a WOW could see us blow thru the upper range while a disappointment could see us test support at $195….

Then we got the Fed minutes. And they weren’t exactly dovish. Minutes from the July meeting told us what we already knew – 3 policymakers wanted to raise rates by 25 bps at that meeting, while ‘several’ were leaning to additional tightening if inflation fails to cool. And that was what I pointed out on Monday – the surprise would be if we learn that more members were leaning hawkish….and we just did.

So again, think about this…. Scotty spent Wednesday trying to push long rates DOWN while the Fed minutes told us policymakers may still need to push short rates UP. And you know who is NOT happy! Trump! But here is the problem – he can jump up and down all he wants, but the bond market doesn’t take orders from the WH – again its Econ 101 – laws of supply and demand.

And then came earnings…. TGT delivered better-than-expected results as comparable sales rose 3.8%, traffic increased 3.6% and digital sales rose nearly 9%. Management raised its full-year sales outlook. LOWs beat on the bottom line but missed on revenues and comps — and more importantly cut its full-year sales outlook while TJX beat earnings and raised its annual profit forecast – failing to impress investors.

But the real star was the news about MRK and MRNA (Moderna). They announced that their personalized mRNA cancer therapy – intismeran - combined with Merck’s blockbuster Keytruda successfully met its primary and key secondary goals in a Phase 3 melanoma trial involving more than 1,100 patients.

And understand what happened here. This is the first successful Phase 3 trial of an individualized mRNA-based cancer therapy. Think of personalized mRNA therapy as giving the immune system a wanted poster of that specific patient’s cancer. Doctors sequence the tumor, identify unique mutations and create an individualized therapy that teaches the immune system exactly which cancer cells to hunt.

Keytruda then takes the brakes off the immune system — allowing those newly trained T-cells to hunt down and destroy remaining cancer cells before they can cause a recurrence or spread.

And investors went wild. MRNA gained 176% or $111/sh while MRK surged roughly 10%.

This morning – European markets are all negative…Germany down -0.5% with Spain lower by 0.1%.

US futures are also struggling to find direction. Dow down 90, S&P’s down 2, Nasdaq up 26 while the Russell is down 3.

Eco data today includes the usual suspects – Initial Jobless Claims and Cont. Claims.

Today we’ll hear from WMT - the street is looking for $0.74/share on $187 billion in revenues – but we want to hear what Walmart says about the consumer. Are they trading down? Are discretionary purchases weakening? What are higher energy prices doing to spending, and most importantly, what does management see for the second half of the year?

We’ll also hear from DE, ROST, WDAY, INTU & ZM.

The S&P closed at 7,707 – up 16 pts…. futures action this morning is muted. 7700 appears to be holding, but we will most likely test it again today. Real trendline support is at 7500 with resistance somewhere between 7,900/ 8,000.

We are now heading into the final stretch of August -and September is around the corner. I’m still in the camp that we could see another draw down as we move into September because the question isn’t whether Scotty can buy enough bonds to move yields for a day -the question is whether the fundamentals give investors a reason to keep them there.