I Said Hey

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Markets are weird. In the 26 days since the Fed cut overnight rates by 50 basis points, the 10-year treasury has gained…59 basis points.

During the rate hiking cycle, interest rate spikes of this magnitude over such a short period have been bad for stocks. But not this time. The S&P 500 has gained 3.8% despite the rapid climb in rates. What’s going on?

Various investors have raised concerns about why interest rates are rising. Most recently, Paul Tudor Jones, a legendary trader* told CNBC “We are going to be broke really quickly unless we get serious about dealing with our spending issues.”**

According to Jones and others, interest rates are rising because credit risk is starting to emerge in the U.S. Treasury market.

I prefer Warren’s explanation. In the tweet and thread below, he says that investors were offside in their expectation of a recession, and the unwinding of this trade is sending rates higher.

It's not quite as sound-bitey as “we’re going broke,” but it is a more reasonable interpretation of the recent rate action. It also supports the first chart I posted.

If you’re wondering why higher rates aren’t hurting stocks, it’s because rates aren’t going higher for reasons that would pose a threat to stocks. It’s simply that bond investors were on the wrong side of the trade. They were positioned for an economy that was decelerating. A strong economy with a strong stock market is more believable than a strong stock market with a country that’s going broke.

Fundamental changes don’t necessarily drive every wiggle in the market. In fact, most days and even weeks (months) can be discarded. I’m as guilty as anyone of attaching a narrative to a move, but the truth is that it’s mostly all noise.

Price inflation is mostly behind us, but noiseflation continues to hit all-time highs.

*Don’t take investment advice from billionaires. Also, this guy has been publicly bearish for a long time. In 2015, he said, “We are going to be broke really quickly unless we get serious about dealing with our spending issues.” But ultimately he’s a trader, and a good one at that. I’m sure he’s done fine, despite his public pronouncements.

**My friend Cullen Roche wrote a nice piece about this.