It’s vacation time, but bond yields keep rising
Quote of the week – from Stephen Innes
Stocks are trading Goldilocks; the front end is trading a finished Fed; the long bond is trading fiscal indigestion; oil is trading geopolitics; gold is trading monetary mistrust — and volatility is trading as though none of it matters!
Interest rates
A combination of lower-than-expected CPI and PPI, weaker retail sales and a decline in consumer confidence produced another drop in short rates this week (following last week’s drop on weaker employment data), with the December SOFR futures contract now pricing less than a 25 bps increase from the Fed by year-end.
The long end of the curve went the other way, with bond yields rising. Thursday’s 30-year bond auction cleared at a 25-year high yield of 5.22%, reflecting the bond market’s term-premium concerns about debt/deficits, inflation, rising supply (the Treasury has stated that it will not increase bond issuance over the next 12 months, but corporate bond issuance is up ~60% YoY), and increasingly “price-sensitive” buyers. The US national debt is expected to top $40 trillion before the end of August, with current annual debt-service costs exceeding $1 trillion.
The yield curve steepened.
In August 2020 (blue ellipse), the US 10-year yield was at a historic low of 0.50%, and the global total of negative-yielding debt was ~$18.5 trillion. In December of 2020, the Austrian government issued an (over-subscribed) 100-year bond priced at 98 to yield ~0.85%. It is now trading at ~30 Euros to yield ~3.2%.
Stocks
The S&P reached new record highs on Thursday following lower-than-expected CPI and PPI reports (less chance of the Fed raising rates is good news for Goldilocks stocks), but drifted down a bit Friday on weaker retail sales and declining consumer confidence. This week’s S&P futures trading volume was the lowest of the YTD.
The VIX traded to a new YTD low on Friday.
Currencies
The DXY US Dollar Index has drifted sideways in a narrow range since late July. (Yen weakness has offset modest strength in EUR, GBP and CAD). COT data shows speculators in the currency futures market built a near-record net long USD position as the USD rallied from 4-year lows in January. That positioning remains largely intact, even after some substantial short-covering in the Yen.
The CAD has continued to trend higher as the US interest rate differential premium has continued to narrow. COT reports as of August 11 show that large speculators in CAD futures have maintained near-record net short positioning, which was built as the CAD fell from ~74 cents in early May to ~70.5 cents in late June. If the CAD continues to rise, I expect some short-covering, which will help boost the CAD. I think much of the recent CAD rally has been due to a weakening USD, not to “something great” happening in Canada. (Well, rising prices for Canadian oil exports may have given the CAD a boost).
The Mexican Peso has rallied against the USD for the last four consecutive weeks and broke out to a new 2-year high this week. Mexican 3-month interest rates are a premium of ~180 bps over US rates.
At Friday’s close, the Yen has given up about half of the intervention gains made from the July 29 lows to the August 3 highs. Most FX analysts agree that intervention alone (even with US help) won’t reverse the Yen’s downtrend, but speculators may be less inclined to short the Yen, fearing more intervention. COT data shows a substantial covering of speculative net short positions in the futures market over the last two weeks. Japanese 3-month rates are ~1%; the forward market is pricing in a 25 bps BoJ rate hike in September, with further increases to follow.
Gold
In recent Notes, I’ve written that front-month gold futures were finding support just below $4,000, and prices have rallied ~$400 (~10%) over the last two weeks. (Note: this is a chart of August gold, which was the front-month contract as gold found support just below $4,000. The “lion’s share” of volume and open interest is now concentrated in the December contract).
The prospect of lower-than-expected interest rates and a weaker US Dollar helped gold rally from sub-$4,000 support, as did reports of “stepped-up” central bank buying. COT reports show a modest jump in net long speculative positioning over the past two weeks as price rose ~10%, and open interest climbed to near 5-month highs. The speculative liquidation that occurred during the decline from the “exuberant” highs in Q1 seems to have run its course, and the “debasement trade” may be back in focus.
Energy
Twenty-four weeks after the US and Israel attacked Iran, the stalemate in the war, with military de-escalation but no (visible) progress on peace negotiations = front-month Brent oil futures at ~$85–90.
Here’s a weekly chart of front-month Brent futures over the past 16 months. Current prices are down ~$36 (~30%) from the 2026 highs made in April.
Refined product prices have remained high as refining capacity (and ability to ship refined product) has been significantly reduced in Russia and the Middle East. Here’s a chart of front-month NY Harbour heating oil; current prices are down only ~11% from the 2026 highs made in March.
Share prices of US refineries are soaring to record highs; Marathon is up ~50% from June lows, up ~20% from last week’s lows.
On my radar
I wasn’t surprised that this week’s S&P futures volume was the lowest YTD; price action this week felt like “summer vacation,” and next week may bring more of the same, but every year markets “get real” with a bang after Labour Day.
The following trading week, starting on August 24, we’ve got the PCE report on the morning of the 26th and NVDA’s Q2 report that afternoon. The Fed’s annual Jackson Hole symposium is August 27 to 29.
My short-term trading
I still have the long CAD position I took in the first week of August. I’ll raise my stop so that I don’t lose money on the trade, but I see no reason to take profits yet.
I shorted the S&P on Friday morning. The market initially rallied on the weaker-than-expected retail sales report (one more reason for the Fed not to raise rates) but didn’t take out Thursday’s high and started to sell off once the floor session began, so I went short. As Stephen Innes wrote in the quote at the top of today’s Notes, it’s a “Goldilocks” stock market, priced for perfection, and I’m willing to place a modest contrarian bet.
Thoughts on trading
Over the years, I’ve “boiled down” my thoughts on risk management to one brief sentence: “What are you going to do when you’re wrong?”
The addendum to that is: “There’s nothing wrong with being wrong, except staying wrong.”
Stephen Innes published a piece about 10 days ago titled: The Market Does Not Pay You For Being The Smartest Person In The Room.
If you are like me and truly believe that being a successful investor/trader requires learning and re-learning how to think and act, I recommend you read this essay. It will take less than 10 minutes.
https://thedarksideoftheboom.substack.com/p/one-for-the-traders-the-market-does
The Barney report
I take a canteen of water and a collapsible drinking dish for Barney every time we go for a long walk in this summer heat. He is wearing a fur coat, and the heat gets to him. If I see that he’s looking for a shady place to rest, then we stop for a drink of water. He loves to roll around in the cooler, shady spots on these hot days.
Listen to Mike Campbell and me discuss markets
On this week’s Moneytalks show, Mike and I discussed how different markets are reacting to the possibility that the Fed may not be raising interest rates this year – given that only a month ago expectations were that the Fed would be raising rates by at least 50 bps, with a 25 bps increase possible as early as September. You can listen to the entire show here. My spot with Mike starts around the 53-minute mark.
The Archive
Readers can access any of the weekly Trading Desk Notes from the past six years by clicking here.
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Victor Adair retired from the Canadian brokerage business in 2020 after 44 years and is no longer licensed to provide investment advice. Nothing on this website is investment advice for anyone about anything.
