The Fed cut rates 175 basis points and all you got was a 5% ten-year and six-dollar diesel · Daily Briefing

In 30 seconds: The US 10-year Treasury yield surpassed 5% for the first time since 2007/2023, driven by persistent inflation concerns and Fed policy, with ripple effects across global sovereign bond markets including UK gilts. Brent crude surged past $125/barrel as Strait of Hormuz tanker disruptions, a damaged Saudi pipeline, and sharply reduced Russian and Middle East diesel exports tightened global energy markets. Markets are pricing in a high probability of a Fed rate hike as inflation remains stubborn, with analysts debating the vote split and whether further tightening risks a policy error. Analysts debate why the US Treasury failed to extend its debt maturity profile since 2016, with LukeGromen arguing this reflects an inability to sell long-term bonds without triggering a crisis, leaving the US fiscally exposed.

The 10-Year Treasury Yield closed at 4.96%, settling 1 bp lower on the day but still flirting with the psychologically important 5% level. The journey here has been remarkable in its perversity. Back in Sep 2024, the 10-year Treasury yield sat at 3.7%. Since then the Fed has cut by 175 basis points, and the reward for all that easing is a ten-year yield roughly 5%. That is a tidy summary of the situation. Treasury tried to help. On Wednesday it bought back $6 billion in long-dated bonds, a move one observer compared to trying to cool a furnace with an ice cube. The contagion is global. The move up in higher-beta G7 sovereign bonds like UK gilts has been even more dramatic, a pattern that one commentator frames as predictive: if you want to know where 10y UST yields are going, just watch UK 10y yields and give it a bit of time. If that relationship holds, the current gilt tantrum is less a foreign curiosity than a leading indicator, which is not the kind of leading indicator you want. The collateral damage is predictable. 10-year Treasury yield: 5%. Silver: $63.59. The basic problem remains: the Fed declared victory, the bond market filed an appeal, and the appeal is winning.

Brent spot prices: $125 per barrel. Tanker transits through the Strait of Hormuz remain severely disrupted by attacks, and the security situation there and in the Red Sea is cutting crude exports from countries around the Persian Gulf. These shocks are hitting at the same time. Then there is the pipeline. AP is reporting that repairs to Saudi Arabia's East-West Pipeline will take three to five weeks. The East-West Pipeline could resume partial flow before then at reduced pressure, but much remains unknown about the full extent of damage to the system. Chinese petroleum product demand fell far more sharply than activity in end-use sectors, with inventories likely buttressing domestic supply for now, but that buffer puts a timer on the swing. Markets are under pressure this morning. S&P futures fell 0.7% this morning, Nasdaq futures dropped 1.65%, and crude was already at $103 before the latest Brent print. Meanwhile, the trade map is quietly reshuffling: Japan's largest oil source is now the United States, which in July accounted for ~37% of the barrels Tokyo imported.

Futures markets are pricing a 90% probability of a Fed rate hike this week. The internal vote math, though, is tighter than the market odds suggest. So the entire edifice of monetary policy rests, as it often does, on one person who has not yet told us what he thinks. Gregory Daco changed Fed call from a hold to a 25bps increase in the Fed funds rate target range of 3.75-4.00%. The logic is straightforward: if inflation is not falling fast enough, you squeeze harder. That is a polite way of saying the Fed should ignore the calendar, which is easy advice to give when you are not the one giving the press conference. Not everyone agrees more tightening is warranted. One camp argues that raising rates while underlying inflation is already easing looks like a policy error in the making. The paradox is neatly captured in one observation: lots of indicators are consistent with two percent inflation — except inflation itself. You have all the preconditions for disinflation except the actual disinflation, which is a bit like having all the ingredients for a cake except flour. The complication is supply-side pressure: futures suggest food and energy prices are set to widen the gap between headline and core inflation, meaning the Fed may be tightening into a problem its rate hikes can't fully solve. National average price of diesel in the US: $6.25 a gallon. Core inflation tells you where the economy wants to go; headline inflation tells you where your grocery bill already went. The Fed has to decide which one to believe, and the answer will cost you either way.

Simple enough: lock in low rates, push maturities out, sleep well. What actually happened is that the US did not increase WAM. The plan was never executed. The question this raises is uncomfortable. Every Treasury Secretary since 2016 either was stupid or could not raise WAM without triggering a crisis. The biggest delta post-2016 was arguably Fed rate hikes, which only made the math worse. Treasury didn't sell lots of long bonds when everyone says they could and should've. This creates a binary for bond investors that is almost comically clean. Bonds are a buy if higher rates and therefore higher interest expense lead to sharp cuts in Entitlements and Defense spending. Bonds are a sell if higher rates and therefore higher interest expense do not lead to sharp cuts in Entitlements and Defense spending. The urgency is greater to cut rates no matter what inflation is doing the closer they get to 100%. Meanwhile, the provocation stands: One of these three is a bubble: Bonds, USD, or Boomers. A compound annual growth rate of 6.7% is, by one measure, way above reported CPI.