Keep Calm and Watch the Bond Market

Good Morning Ladies and Gentlemen

“The dynamics of many complex systems resemble those of a sand dune, where countless grains of sand accumulate in a seemingly orderly and stable arrangement until an inconspicuous additional grain triggers a small or large avalanche, setting in motion the ever-recurring cycle of formation, instability, and reorganisation.”

Attributed to Mike

Fire At The Far End?

My partner Ronnie Stöferle sends out a very enjoyable e-mail every week to friends and family. Last week, he wrote among other things about the fact that the global bond market is experiencing significant shifts, with the 30-year US yield rising to 5.34% on Tuesday (a week ago), its highest level since 2007. Meanwhile (by Friday last week), the 10-year yield hovered around 4.73%, nearing a 19-month high. Ronnie states that years of fiscal indifference are finally catching up with governments, with some delay, and compounded by the impact of a strong wake-up call. Well, well, well, I love it, and yet I wonder whether the Jackson Hole participants can convince markets that all of this is under control.

Friday’s Jackson Hole Meetings

As markets approach Friday’s Jackson Hole session, the focus is shifting from interest rates alone to the interplay between inflation, government debt, and the recent Treasury bond buyback program. Investors anticipate that Fed Chairman Kevin Warsh will address not only inflation but also the sustainability of U.S. fiscal deficits. Additionally, they will be looking for insights regarding any consensus reached with Treasury Secretary Scott Bessent concerning the increase in long-term yields. A pertinent question is why the U.S. Treasury is conducting the bond buyback program instead of the Federal Reserve? This distinction is significant because Treasury buybacks serve as a debt-management tool, whereas Fed purchases are interpreted as monetary policy, raising concerns about debt monetisation. Warsh seems inclined to maintain some distance from the initiative, preferring to assess the situation first and gather input from various working groups before committing to a long-term policy framework. For equity investors, the outlook remains positive. As long as Treasury yields and oil prices remain stable or increase only modestly, financial conditions should remain accommodative, allowing the stock market’s rally to continue.

What Can Be Expected From Fed Chairman Kevin Warsh

However, market participants will closely and immediately analyse every statement made by Fed Chairman Kevin Warsh during his address at Jackson Hole, as his comments could significantly influence expectations surrounding inflation, fiscal policy, and interest rates. Should Warsh express concerns about persistent inflation or the swift increase in government debt, Treasury yields may rise, potentially creating challenges for equities. On the other hand, a measured approach that emphasises patience, data-driven decision-making, and a gradual evaluation of economic conditions could instil confidence in the markets. Investors are also keen to discover if there has been any dialogue between Treasury Secretary Scott Bessent and Fed Chair Warsh regarding the escalating long-term borrowing costs. Frankly, I would be very surprised if there has not been any such dialogue between them and then again…
I further think that special attention will certainly be given to the Treasury’s bond buyback program (mentioned above) and the justification for maintaining the Federal Reserve’s current stance.

Conclusion: Marcus Aurelius Or The Art of Remaining Calm in Turbulent Times

Just imagine the most powerful man in the world at the time, a Roman emperor, military commander and crisis manager, was writing not a manifesto but a private diary. Without an audience and without any pretence, Marcus Aurelius reflected on how to stay virtuous amid uncertainty and pressure. His Meditations are not a philosophical theory but a deeply human attempt to remain calm, disciplined and decent when circumstances seem beyond one’s control. That timeless lesson remains as relevant today as ever, as times seem a little crazier on a daily basis!

Ladies and Gentlemen

Feel free to send your messages to smk@incrementum.li. Many thanks, indeed!

I wish you an excellent start to the day and weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
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9494 Schaan/Liechtenstein
Mail: smk@incrementum.li