JPMorgan strategists have doubts that the plan to buy more longer-term bonds will work out as the Treasury Department hopes.
After a headline-grabbing move by the U.S. Treasury to repurchase more longer-term bonds, yields on that debt are modestly creeping back higher on Thursday, while stock-market futures indicate a struggle ahead.
Time will tell if the Treasury Department's plan will have the desired effect of lowering long-term bond yields. In our call of the day, JPMorgan strategists weigh in with a warning not only that the move will not work but that it wasn't needed in the first place.
Strategists Jay Barry and Jason Hunter predict fallout from the Treasury's move. Investors, they say, will ultimately start to demand extra return for holding long-term bonds, known as term premium.
"In essence, while [Wednesday's] events were effective in lowering long-term yields, this only addresses the symptoms and not the root cause: [that] the U.S. continues to run a 6% budget deficit in an economy near full employment," said Barry and Hunter, in a note to clients on Wednesday.
The pair warned that without "real fiscal consolidation" markets could "view this action as lacking credibility." That could drive term premium and yields higher over time if the Treasury breaks with a stance it set up decades ago to issue bonds on a "regular and predictable" basis, they said.
Markets have been nervously watching the rise of yields on longer-term bonds, as those can drive up borrowing costs for businesses, households and the federal government.
The climb in yields seen this summer has been blamed on worries about inflation, government spending and the volume of corporate debt issued by tech companies to fund capital expenditures on artificial intelligence. For stock markets, the worry is that higher bond yields will lure investors away from perceived riskier equities and raise the cost of capital for corporate entities.
Barry and Hunter said there is a risk the Treasury could now try to reduce long-end auction sizes, pointing to actions taken by other governments that haven't met with stellar results.
In the U.K., they explained, the government's debt-management office has tried to lower long-term bond yields by decreasing the amount of supply in the market. While that worked well initially in 2022, at the time of a minibudget crisis, a string of successive announcements over time had increasingly less impact. They noted that long-term gilts are currently hovering near multidecade highs.
"Using the U.K. as a guide, aggressive moves to cut the long-end share of issuance can have a pronounced impact, but they are not lasting in nature, and each successive announcement has led to a smaller outperformance at the long end," Barry and Hunter said.
"Accordingly, we believe [Wednesday's] actions are likely to have a fleeting impact on long-end yields unless action is taken to reduce the debt," the strategists repeated.
As for how to invest, Barry and Hunter recommend holding on to 2-year/10-year "steepeners," meaning is a bet that longer-term Treasury prices will underperform their shorter-term counterparts, driven by more supply and inflation concerns. Also known as a bear steepener, it's a wager that investors will ultimately demand higher yields on longer-term bonds.
Traders typically bet on this through buying a 2-year Treasury bond while selling or even betting against 10-year notes.
Barry and Hunter said they found Wednesday's surprise move by the Treasury odd given that it had just announced its buyback operation calendar for the next three months only two weeks prior. They added: "We can find nothing in market functioning that would force Treasury to increase long-end buybacks at this moment," they said.
The markets
U.S. stock-index futures (ES00) (YM00) (NQ00) are tumbling dropping as longer-term Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD30Y are on the rise. The dollar DXY is falling.
Key asset performance Last 5d 1m YTD 1y S&P 500 7707.98 -0.52% 2.79% 12.60% 20.52% Nasdaq Composite 26,331.09 -0.97% 2.49% 13.29% 24.36% 10-year Treasury 4.676 2.90 -2.40 50.40 34.60 Gold 4544.5 3.12% 12.15% 4.90% 34.31% Oil 86.39 6.38% -6.46% 50.48% 36.09% Data: MarketWatch. Treasury yields change expressed in basis points
The buzz
Walmart stock $(WMT)$ is down after sales were hit by falling drug prices.
Deere (DE) will also report ahead of the open.
Bitcoin (BTCUSD) has pushed above $70,000 for the first time in over two months, giving a boost to Strategy (MSTR), Coinbase (COIN) and Robinhood (HOOD).
President Donald Trump said the U.S. will start a "crushing economic campaign" against Iran and "consequences" for any entity doing business with its regime. Oil prices (CL.1) (BRN00) are up 2%.
Wolfspeed's stock (WOLF) is down 12% after earnings from the maker of silicon carbide wafers and power chips.
Weekly jobless claims and the Philly Fed business survey will be released at 8:30 a.m., followed by leading economic indicators at 10 a.m.
U.S. conducting stealth operation to transport oil through Hormuz.
The chart
The AI boom is not quite turning into a bubble, according to this chart from Exponential View (h/t Daily Chartbook), an independent research organization founded by Azeem Azhar that studies AI's future impact. An updated dashboard from Azhar and research analyst Nathan Warren shows how their gauges look now versus a year ago - trouble for the AI boom is looming if two gauges are in the red. "While the hyperscalers are still using a large share of their cash reserves, they are increasingly scouring the globe for capital, both straight-up debt and increasingly intricate financing vehicles," Azhar said in a Substack post. "Funding quality has deteriorated since [September] 2025. In our base case, we expect it and economic strain to turn red during 2027."
Top tickers
These were the most searched ticker symbols on MarketWatch as of 6 a.m.:
Ticker symbol Security name MRNA Moderna NVDA Nvidia TSLA Tesla SPCX SpaceX MU Micron AAPL Apple AMD Advanced Micro Devices TSM Taiwan Semiconductor Manufacturing SNDK Sandisk AMZN Amazon
... and spaghetti beer.
-Barbara Kollmeyer
Comments