Gerald Ashley and George Cooper are back on Equitile Conversations after a break, and they go straight into the bond market. In short, it looks stretched.
US debt is heading forUS$40 trillion, and at the same time the AI buildout is creating a mountain of private borrowing for data centres. That extra paper is starting to compete with US Treasuries and is pushing long yields higher. Old-fashioned crowding out, just with shinier branding.
Kevin Warsh has also dumped the Fed’s old habit of spelling out where rates are going. For years markets just priced whatever officials wanted, now Warsh wants traders to do more of the work. Cooper brings up Mervyn King’s Maradona idea: the Fed can run straight down the middle and keep policy rates fairly steady while everyone else guesses left and right and moves long rates around.
There’s a practical reason too. A lot of US debt now sits in short-term T-bills, risk hiking rates hard and the interest bill shows up almost immediately. So, letting the long end sell off allows Warsh to say the market is doing the tightening for him. Cooper thinks Warsh and Treasury Secretary Scott Bessent are basically working on the same messy inheritance: inflate the debt down without blowing everything up. However more short term Treasury bills means more rollover risk, especially with leveraged funds sitting on a significant chunk of them.
Markets look like they’ve noticed; Gold is moving again, the dollar is softer, commodities are stirring. That’s the debasement trade coming back — hard stuff you can’t print and that doesn’t go out of fashion. The same steeper yield curve splits stocks. Long-duration tech with huge multiples gets hit by higher discount rates. Cash-generative value names and a bunch of cheaper smaller companies — Cooper’s “anti-bubble” — look better placed.
Passive money continues to pour into the giants, so as ever the brakes are off. Adding to the mix, politicians still won’t cut spending. Federal outlays are now running at about US$7.3 trillion with a US$1.7 trillion shortfall. Elsewhere, the El Niño weather system and continuing fertilizer shortages because of the Iran conflict could add a food-price nudge.
Neither are calling for an explosion next week. Rolling everything to the front end can keep this going for a while.
This Episode’s Book Recommendations
Gerald
1873: The First Great Depression and the Making of the Modern World by Liquat Ahamed
George
The US Debt Clock
Gerald Ashley 