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Big banks kicked off earnings season last week, and now the main event for many investors begins: Two of the Magnificent Seven, Alphabet and Tesla, unveil quarterly results this afternoon. Tech stocks look set to slump after Tuesday’s big rebound, with oil prices climbing on fresh threats to Middle East supplies.
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A new post-financial crisis high
If they handed out medals for wrongness, a U.S. government report 25 years ago would have won a spot on the podium.
The Congressional Budget Office in January 2001 predicted such large future budget surpluses that it said all redeemable U.S. government debt could be paid off within five years. That year the Treasury Department stopped issuing its longest-dated borrowings, 30-year bonds, because what was the point?
Treasury reversed course five years later as deficits instead widened, yet those bonds remain an afterthought. They shouldn’t be. Their real (inflation-adjusted) yield just hit its highest level since 2008.
The long bond isn’t as closely followed as the 10-year note, the benchmark shown daily in this newsletter and important for things like mortgage rates. But it’s in some ways more informative because its price is so sensitive to changing economic assumptions. The message it’s sending lately isn’t an encouraging one for Wall Street or for Washington.
Bonds have something called duration—the weighted average time it takes to receive their cash flows. Stocks are similar, except those flows aren’t known for sure in advance and stocks never mature. Today’s hottest stocks have very long durations since they pay small or no dividends and dangle distant profits when they’re expected to dominate AI or space or whatever.
The upshot is that stocks’ future cash flows can’t be measured in isolation—they’re compared with what you could earn risk-free from the government. Since long bonds have the closest duration to the S&P 500, their rising real yields raise the bar for stocks, all else being equal. That’s why tech stocks sometimes sell off along with bond prices when there’s a strong jobs report.
Then there’s what the 30-year bond yield is saying about Uncle Sam’s finances. By themselves they don’t raise federal interest costs much since most debt issued these days is short-term. They do reflect investors’ creeping doubts about the government’s future ability to pay, though.
It’s unlikely that the U.S. or other developed countries also facing stress will actually default, but there are other ways to deal with unsustainable borrowings. One is letting inflation quickly erode their value. It’s possible for governments to kick the can down the road for five or 10 years and hope the next people elected will make tough decisions. Not for 30 years.
Investors’ nervousness is actually understated since there are eager buyers for long-term debt that help keep yields in check. Pension funds and insurers that need to match the durations of their liabilities with similar assets snap up the longest-dated bonds even when yields are absurdly low. Six years ago Austria sold a 100-year bond paying zero percent.
Distortions notwithstanding, long bonds are a useful litmus test for financial angst. Keep an eye on them.
This is an edition of the Markets A.M. newsletter, preparing you for the trading day ahead with expert insight into the companies and industries set to move markets. If you’re not subscribed, sign up here.
Stocks I’m Watching
↗️ Super Micro Computer: Shares surged in premarket trading after the AI server maker projected fourth-quarter gross margins roughly double those it had originally targeted. Rivals Dell Technologies and Hewlett Packard Enterprises also rallied.
↗️ Airbus SE: Shares in the aerospace company jumped after it issued ambitious mid-term targets to boost profitability.
🔎 Philip Morris: The tobacco company is slated to report earnings this morning.
🔎 Alphabet, Tesla, International Business Machines, Southwest Airlines: The companies are due to release second-quarter results after the market close.
One Big Chart
It’s a luxury goods smackdown: Are Cartier Love bracelets about to replace the Hermès Birkin bag as the product that drives the best shareholder returns in the luxury-goods industry? Hermès still has an edge.
What I’m Reading
A record level of private-equity investments are stuck in “zombie” funds limping along past their intended lifespans. (WSJ)More than 1,000 Americans racked up IRAs worth at least $25 million. Many bought stakes in startups initially worth tiny amounts. (WSJ)Airbus is coming for Boeing in the battle over the world’s biggest jets. (WSJ)Members of the Barron’s Round Table revealed 45 of their stock picks. (Barron’s)We’re all systematically blind to how often things fail. (The Big Picture)
Today in Markets History
📰 On this day in 1944, the Bretton Woods Agreement was reached in Mount Washington, N.H., pegging major foreign currencies to the U.S. dollar, fixing the gold price at $35 per ounce and laying the groundwork for the International Monetary Fund and the World Bank.
Beyond the Newsroom
WSJ | Buy Side: Borrowers with excellent credit are more likely to get the best interest rates and terms when refinancing an auto loan.
About Me
Business and finance have fascinated me for a long time. Before writing this newsletter, I edited The Wall Street Journal’s Heard on the Street team for a decade, wrote two investment books and managed a team of stock analysts at a global investment bank.
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