Submitted by Peter Tchir of Academy Securities
Treasuries, European Sovereign, and even Credit. Something seemed rotten this week, with Thursday’s price action in all 3 of those markets triggering the need to focus on this more. Debt markets underpin the entire global financial system and when things don’t “look,” or “feel,” or “smell” right, it warrants our collective attention. Yes, “feel” or “smell” doesn’t seem compelling as some authoritative answer, but that doesn’t mean it isn’t worth exploring.
For the past few weeks, our biggest complaint on Treasury yields has been that neither Bessent nor Warsh is addressing the root causes of higher Treasury yields. The root causes have far less to do with economic variables, inflation, and Fed independence, and much more to do with a global supply glut. Not just of sovereign debt. Not just of corporate debt, but also corporate debt adjusted for average duration as companies who need to issue longer-dated bonds have dominated the flow.
We will take a quick look at each of these markets.
There Are No Treasury BearsOk, that sounds ridiculous. How can something that has been trading so poorly have no bears? Isn’t everyone bearish? The price of oil (and diesel) is bearish. The deficit is bearish. The long-term trajectory on total debt is bearish. The fact that interest payments on debt are now greater than discretionary spending is bearish. The global supply is bearish. The corporate supply is bearish. The fact that countries like Saudi Arabia have gone from being buyers of Treasuries, to needing a loan to fund their operations is bearish. Questions about the global reserve status of the dollar (which is overdone) is bearish. The fact that across the globe investors seem less inclined to own Treasuries on their balance sheet (corporate debt, debt denominated in their own currencies, etc. are preferred) is bearish. A Fed that isn’t independent is bearish. A Fed that is independent is bearish. Etc.
There is NO shortage of reasons to be bearish on Treasuries. Over the past month or longer we have presented many of these reasons. Our primary focus has been on supply and how much duration has been sucked out of the market by the corporate debt issuance. Not to mention that I believe we have set back-to-back records for the largest HY deal ever, and even a $10 billion corporate deal, which at one time would have caused some eyes to open, but now has become de rigueur. But more on corporates later.
Let’s get back to the matter at hand, the “claim” that No One is Bearish Treasuries.
I’ll offer up the T-Report as the first piece of evidence. In last weekend’s T-Report, despite giving more reasons for Treasuries to go higher, we made an effort to state we were neutral on Treasuries in Stocks +1, The House -1, The World ?. That didn’t stop us from recommending fading the bond market Friday morning, but we did not come into this week “pounding the table” to be bearish on bonds.
Yes, the T-Report is a tiny sliver of the research and commentary produced. But everywhere I looked, I saw bullish or neutral takes on the market. I do not remember a single guest on financial media that was pounding the table about shorting bonds here and now. Ok, there are couple of “end of fiat” people out there who were pounding the table, but they tend to always pound the table on that subject and are presenting a vision of global catastrophe without a tradable timeline.
I can tell you that when we were bearish and arguing to fight Bessent, Treasuries & Treaties, most of our conversations had been with investors buying Treasuries. We’ve attempted it a couple of times during this move (with some wins and some losses). The point being that while there might be a lot of material published on problems facing bonds, that doesn’t seem to match positioning at all!
One bond watcher is apparently bullish for the first time in 6 years. I cannot tell you the number of times that story made it into my stream, on social media, and work e-mails/Bloomberg msgs. You know what people who are short the market don’t do? They don’t forward to everyone they can, articles about this being the best buying opportunity in a decade. That is not how human nature works. Maybe everyone is so scared, while being short, that they felt the urge to share this story. Or, maybe, long and nervous, they were trying to convince people of the latter. That makes the most sense to me, and why I was trying to raise my hand and say “I’m neutral” not bearish.
How Can Yields March Higher if There Are No Bears?I think the better question might be, how can they not? But, I guess before wading into analysis of “how” this could be happening, let’s just present the slide that shows it is happening! And the moves are getting “worse” even as we put FOMC behind us and oil prices have been receding. The move from 4.6% on 10’s as recently as August 25th, to 5.27% on Friday, is quite astounding. The speed of the moves is as problematic (or probably more problematic) than the levels involved. The one way nature of the move is perturbing, but I think following analysis is at play and helps us understand the move better.
As a contrarian, it is easier to move markets against positioning than with positioning. If everyone was bearish and positioned that way, it would be a lot harder to push Treasury yields higher.
So, let’s lay out a scenario that I believe is at work below the surface.
A Lot of “low conviction” longs in the market.
Traders are long Treasuries for a trade. Asset managers are slightly overweight duration versus their benchmark. No position is particularly large (which is important) because the trend has clearly gone against you.
That would sum up my conversations, and even my own thoughts on trading this.
True “depth of liquidity” is low in the age of electronic/algo trading. Everyone (and every machine) is trying to scrape out a cent here or there on trading, making it look like there are massive amounts on the bid and offer at any time, but only a tiny fraction represents traders truly trying to commit capital at that level, and the rest is just jockeying for position.
Enter the “quant” funds. That is probably the wrong name, but I’m looking for traders without emotion. Something very systematic in nature. I’d lump what I often refer to as “windshield wiper” algos: algos that sweep back and forth looking to trigger stops, in this category.
The windshield wipers sweep back and forth trying to trigger movement. Buy a little. Buy a little more. Did the market move in your favor? No. Then sell it and get a little short (ok there are some shorts in the market, or else my idea wouldn’t work, but I still think it is a tiny fraction of the positioning). Sell a little more. Did it move? Yes. Then do not book profits. Sell more. Keep selling until selling doesn’t beget more selling!
There are some larger quant/systematic traders that will build big positions during this type of trading. These are the “quick” windshield wipers, but something with a broader tolerance for losses, while looking for big gains.
Unlike many traders (especially me), they are not quick to book a profit. When momentum is going, they push more. They grow their position even as the market moves in their direction.
They are agnostic (or emotionless) and only “know” that selling begets more selling and buying does NOT beget more buying.
Small positioning matters too. If you are at a hedge fund and long $100 million of 10s, you are quick to close out. If you are long $10 billion of 10s, you might try to fight whatever is pushing the market. In my experience, small position sizes make it easier to move markets, because no one has the conviction, nor the incentive to fight moves.
Many traders are momentum traders at heart. Momentum is consistently one of the top-performing strategies. So, even those who may have taken a swipe at getting long Treasuries will go short for a trade (yes, somewhat against my bold statement that there are no shorts, but this is more about during a move to higher yields than at the start of the day). So, day traders pile into momentum and the only momentum that has really worked is for higher yields.
If and when the selling stops creating more selling, the “emotionless” will cut their shorts just as quickly. We will get a vicious snap higher in price, lower in yields, and the worst will be behind us, but so far, there are so many reasons to be nervous about bonds that selling begets selling. Some of the bond market issues need to be resolved, with oil and diesel being the ones that have the best opportunity to “fix” themselves and end the current vicious cycle.
While Treasuries are facing a lot of hurdles, I strongly believe that underlying the price action is the sort of behavior described here. It is unclear that we are close to the end of selling creating more sellers. We may not get there until either we get conviction from the bulls that we are at a level that is worth supporting, or people start positioning themselves as bearish as they talk.
In the “for better or worse” category, TLT (a 20+ year Treasury ETF) has received large inflows and shares outstanding are now at their highest level since late 2024. That does kind of match the point that there are no bears. On the other hand, retail has done a great job “buying the dip” on equities, so they may be right here and are ahead of the “pros” because having stop losses might be great for risk management, but can prevent people from taking advantage of what might be really good buying opportunities. Retail bought the dip post Liberation Day, before the pros. Don’t underestimate their power, but at the same time, don’t believe “everyone is short” treasuries, as that narrative is just not true.
European Sovereign DebtRising global bond yields was on my radar. But whatever just happened between German bond yields and French and Italian bond yields was not.
European bond yields rising as spending on defense and infrastructure increases, made perfect sense. What is harder to figure out is this move in French and Italian yields relative to German yields.
The French deficit is going to go above the EU “targets”. Looks like 5% instead of 3%. That helps explain the move higher in French yields (and Italian). But the move in German yields? Are we really having a “flight to quality” in Europe? And Germany, losing their industrial base, having a major shift in politics, is the “go to” place for safety? I guess, but it all seems odd.
Maybe investors were being “lazy” and were picking up the “extra” yield in France and Italy for the same “risk” as Germany, only to realize the risk might not be the same, and were forced to unwind?
That seems plausible.
I don’t want to bring up Frexit or all the other weird words that were tossed around after Brexit, but maybe not only is Europe starting to embrace ProSec™ each of the larger companies is starting to do what they think is right for their country? That the construct that gave countries the size of Hungary (with their Russian leaning political influences) almost as much power in some votes as France, Germany, Italy, etc., doesn’t work as countries start taking steps towards vertically integrated nations. Even vertically integrated “blocks” likely need the biggest and best prepared countries to take leadership and drive the group forward.
Macron seems more comfortable “speaking up” for Europe – the release of diesel from Europe’s SPR seems like a good example of that.
I don’t know what is going on here, but it does not seem good. This fairly rapid, “repricing” of relative credit risk in Europe could be nothing, but I suspect it is hinting at a deeper problem:
The broader trend of European yields higher fit our overall macro view and made sense.
This recent divergence caught our eye as something “off” and worth paying attention to. I’m not in alarm mode or anything, but who would have thought markets need yet another thing to worry about? And yet here we are.
Any “cracks” in global bond norms deserve attention and I think this qualifies as some sort of a crack. Maybe just a crevice, certainly not a canyon, but a crack, nonetheless.
Credit SpreadsThere is an entire cottage industry dedicated to calling for the “next” GFC. It often starts with worrying about BBB spreads, or sometimes structured/opaque credit, because those seem to be areas big enough to scare people, and difficult enough for the average person to understand, that it is easy to scare them.
My background is in credit, but I rarely write about it lately, because it has been soooooo boring! I’m not going to go all doom and gloom, but for the first time in ages, I better dust off some of my tools to look at credit. We will look into this more closely next week, but again, just like the European bond market, something is going on that deserves some attention.
While I won’t go all doom and gloom, I will throw out one piece of “shade”. I remember being trained in high yield and being told that the RJR deal was the biggest high yield bond deal ever. That despite being “absorbed” it marked the top.
Bond markets are much bigger and more sophisticated now. There is “less” of a differentiation between high yield and investment management, though I’m till astounded how big that break can be. The difference between the average BBB- company and BB+ company is minimal (and there are times that people can argue, that due to rating agencies being slow to upgrade to IG or downgrade to HY, the better credits might be lower rated). Due to investment guidelines, in funds, or regulated entities some differentiation between the two markets still exists. I believe we just had 2 of the largest high yield bond deals ever? Again, these deals were well telegraphed, but PSKY 8.875% 2nd lien bonds due 2034 (BB composite rating), that were issues at par, traded below 95% on Thursday and 96% on Friday, to close the week at 96.5%. A 3.5% loss on $4 billion of bonds will leave a mark ($140 million to be exact) on bond buyers, especially the “fast money” crowd, but even long only won’t be happy with that.
One thing that greatly reassured me, and lets me believe I can wait until Monday or Tuesday to do a deeper dive into credit (this weekend is too nice in the metro area to be stuck inside typing), was that both HYG and JNK (two large HY ETFS) were trading at NAV. Any time the credit ETFs trade at a discount to NAV, is a danger signal in my book. It means there are market dislocations, and trading at a discount tends to create more selling. That might seem counterintuitive, but we’ve explained the ETF Death Spiral™ in detail, and it continues to be an incredibly useful indicator. So when I see ETF down 2.5% or so in a month, and hitting new lows, you want to see how they are trading versus NAV. Both are trading very “normally” which is good. The same is true for LQD (long dated IG) and VCSH (short dated credit). These are all saying “orderly liquidity”! Not quite the same as “nothing to see here”, but close.
The CDX index has widened from 50 to 60 in a two weeks. The Bloomberg Corp OAS has only moved from 75 bps to 82 bps. I feel obligated to mention it, but as something that is “observed” rather than traded, I want to pay more attention to the CDX index for now.
CDX traded up to almost 70 in March at the start of the war, so that is “good” we are only at 60.
One thing I don’t like is that while the S&P 500 traded marginally higher on Thursday and had a strong day on Friday, the CDX index which is often correlated with the S&P 500, was wider on Thursday and basically unchanged on Friday. If you told me what the S&P 500 had done, I’d have guess wrong on what the CDX index had done. While “decoupling” is a bit strong, when you are looking for early signs of something “bigger” like we’ve already seen in treasuries, just saw in European sovereign debt relative value, it is not nothing.
Bottom LineWe often hear from other market participants that they want to pay attention to fixed income. That they understand that fixed income is a behemoth and often difficult to understand. But that if fixed income cracks, equities have trouble doing well. They say that, but they really don’t like their positive narratives being interrupted.
VIX is barely above 15 (well below it’s average of 18 for the year). The MOVE index, the bond market equivalent of VIX (not quite, but close enough for now), is at 107. Just below its peak of 115 in March. Well above its 1 year average of 74.
I’ll start the week neutral on rates, since “fade the move” worked so well on Friday, but I’m nervous.
Whatever just happened in European sovereign makes me nervous. Credit doesn’t make me nervous, but for the first time in years I’m paying some serious attention to spreads.
A deal with Iran, more news on the compute front, can help, but away from all of that, equities seem to be ignoring some fixed income market moves (and not just the headlines on long bond yields) that equities might wish they’d pay more attention to.
Call me nervous, not scared, and extremely happy with this weekend’s weather (in the Northeast)!
Fixed income is sending some sketchy signals, and to the extent positioning is wrong, those signals risk turning into something bigger
Tyler Durden Sun, 10/04/2026 - 14:00One of the enduring weaknesses of the modern US economy is the lack of redundancy. As long as most of the world is operating normally and there are no serious geopolitical disruptions, America's "just in time" system works fine. But, throw a monkey-wrench into distribution, global exports, freight systems, shipping or elements of production and cracks quickly form in the armor.
This does not mean that the US economy can't adapt; the pandemic shutdowns were horrifically pointless but they did prove that the system has the ability to function despite deep deficiencies. However, when it comes to the management of vital resources, such as energy resources, it's clear that some changes need to be made in the near term.
Before the war in Iran a large portion of the public was oblivious to the fact that the US is the largest exporter of oil in the world, and of the foreign oil supplies we do receive, only 8% come from Gulf nation producers. A mere 7% of those supplies travel through the Strait of Hormuz. In other words, the US doesn't rely on the Gulf for oil. With the new Venezuelan deal and oil flows from the gulf back to 98% of pre-conflict levels, the war is even less of a concern when it comes to US energy.
The problem is, there is a global oil refinery capacity shortage, and the US is not adapting as it should.
Ukrainian drone strikes against Russian refineries have recently forced the Kremlin to cut off all diesel exports to other countries. Russia is the second largest supplier of diesel in the world with 12% of all exports. This loss to global markets is straining already struggling refineries and causing prices to climb. The only country with the ability to increase refining capacity quickly is the US, but it's not happening.
The last time a full-conversion refinery was built in the US was Marathon’s Garyville, Louisiana plant. It came online in 1977 at about 200,000 b/d and has since been expanded to about 617,000 b/d. Most U.S. capacity growth since the 1970s has come from expanding existing sites, not building new ones.
In five decades, no major infrastructure has been added. This means that as aging plants shut down, or as they are closed down due to state policies, US refining capacity will continue to fall and the ceiling for supply vs demand will get tighter and tighter.
Currently, national demand for distilled products is 8.7 million b/d, and production provides only 9.5 million b/d - That's an extremely narrow gap at 95%-98%. Unfortunately, this gap has narrowed further due to refinery closures in 2025. The largest drop in U.S. capacity came from the shutdown of the LyondellBasell’s Houston plant (about 264,000 barrels per day) and the Phillips 66’s Los Angeles plant (about 139,000 barrels per day). Together those removed about 400,000 b/d; small expansions elsewhere offset some of that, but not enough.
The Houston plant was built in 1918 and was so old any expansion or updating would have been too costly. Plants in California, on the other hand, have been closing due to crushing regulations. Valero’s Benicia plant (about 145,000 b/d) stopped refining this spring and was taken out of monthly capacity later.
The answer to refinery shrinkage has long been "expansion creep" in existing facilities because it's faster than building brand new infrastructure, but this is not going to help for much longer. Current facilities are limited in their ability add on more capacity and these measures do not account for abrupt global changes, wars and crisis events.
The US needs redundancy, not "just in time" economics.
Estimates suggest that up to eight new refineries (for heavy and light crude) running at least 250,000 b/d would be needed to increase the capacity ceiling while adding modern infrastructure and redundancy to offset aging plants. A safer margin would be demand at 85%-90% of capacity. This would also help the US to add supplies to any global market shortfall and keep prices from skyrocketing in the event of ongoing wars.
What's stopping this from happening? There's a number of obstacles. First and foremost, no one wants to sink billions of dollars into a new facility based on higher gas margins that might be temporary. In other words, investors will wait around until there's a catastrophic disruption and prices go out of control, but by then it will be too late.
This means it's likely that the only way to get new refineries built would be for the US government to partially backstop the investment. It's not the worst way to spend taxpayer money; everyone likes lower gas prices. Getting such a measure passed through congress is questionable, though.
One possible avenue would be profit sharing with taxpayers on excess fuel sold, or on exports sold from new refineries. This is similar to the Saudi Arabia model, which invests some oil profits back into healthcare, education, housing loans, and cheaper fuel and utilities for citizens. Of course, Saudi Arabia is a monarchy and moving from theory to practice in the US is another matter.
Then there's the permits, environmental studies and regulations, and a lot of other red tape that can extend build time up to 10 years. Even with a streamlined bureaucracy, it can still take 3-5 years. With government aid, the time can be reduced to 1-3 years. It's clear that this is not a quick fix in any scenario, but if the process had been started a few years ago, then there would be no capacity issue and there would be no need for this discussion.
Again, the US economy is almost designed to avoid redundancy and preparedness.
There is the possibility that a rush to build refineries is unnecessary in the short term. With ship traffic in the Hormuz returning to normal, prices on oil will continue to drop. This does not mean, though, that gasoline prices will fall in tandem, at least not for months to come. The war in Ukraine also looks like it will be ongoing for some time, which means Russian supplies will not be returning to global markets.
Refineries are a long term solution which requires long term planning; something which is nearly impossible within the US where the political landscape changes every 2-4 years. It is also extremely difficult when half the government under Democrats wants to tear down oil infrastructure and force the country to accept inefficient green tech. The point is, there are obvious fixes available, but nothing will happen until disaster strikes and politicians are effectively frightened.
Tyler Durden Sun, 10/04/2026 - 13:30Authored by Aldgra Fredly via The Epoch Times,
The United States and Australia on Oct. 2 suspended consular services in Brazil, citing security concerns ahead of the country's high-stakes presidential elections.
Security personnel stand outside the U.S. embassy after consular services were suspended due to security concerns in Brasilia, Brazil, on Oct. 2, 2026. Eraldo Peres/AP PhotoThe U.S. embassy in Brazil issued an alert advising U.S. citizens seeking emergency assistance to contact the appropriate duty officer instead of visiting the embassy or other diplomatic facilities.
The Australian embassy also announced its closure in a notice, advising citizens seeking urgent consular assistance to contact the consular emergency center in Canberra by phone. It also urged people not to visit U.S. diplomatic facilities in Brazil, citing the U.S. embassy's security alert.
No details were provided about the security concerns that prompted the closures. The State Department said it coordinated with Brazilian officials to address security concerns.
Brazil's federal police said on Oct. 2 that they conducted a preventive operation in Sao Paulo and the Federal District targeting activity that could threaten U.S. diplomatic facilities, but have not yet identified any suspects linked to criminal organizations.
Police said the investigation stemmed from cooperation with foreign intelligence agencies and is still ongoing following the seizure of communication equipment.
Brazil will hold the first round of its presidential election on Oct. 4, with incumbent Luiz Inácio Lula da Silva and Sen. Flávio Bolsonaro among the frontrunners. If neither wins more than 50 percent of the vote, a runoff vote will take place on Oct. 25.
Bolsonaro is the son of former President Jair Bolsonaro, who is serving a 27-year prison sentence after being convicted of plotting a coup following his 2022 election loss.
Last year, U.S. President Donald Trump imposed a 50 percent tariff on Brazilian imports, citing the prosecution of Jair Bolsonaro. The U.S. government also sanctioned Brazilian Supreme Federal Court Justice Alexandre de Moraes and revoked his visa, along with those of his judicial allies and their family members, over what it called "censorship of protected expression in the United States" and a "witch hunt" targeting Jair Bolsonaro.
Lula has condemned the U.S. moves as interference in the Brazilian justice system.
The U.S. State Department on Aug. 31 placed Brazil under a "Level 2-Exercise increased caution" classification, while some areas of the country are designated as "Level 4-Do not travel," the most severe of the four advisory levels.
The advisory warns that violent crimes are common in urban regions of Brazil, including murder, armed robbery, and carjacking.
"Assaults are common, including with sedatives or drugs placed in drinks, especially in Rio de Janeiro," it stated. "Criminals target foreigners through dating apps or at bars before drugging and robbing their victims."
Naveen Athrappully and The Associated Press contributed to this report.
Tyler Durden Sun, 10/04/2026 - 13:00