Duck, duck, goose

• The three major US indices finished near the flatline on Wednesday, as investors weighed the latest inflation figures, which came in line with forecasts.

• The S&P 500 booked marginal gains, and the Dow gained 47 points or 0.1%, while the Nasdaq ticked lower by 0.2%.

• This reinforced the Federal Reserve’s potential December rate cut, with CME FedWatch showing an 80% chance.

• In corporate news, Super Micro Computer plunged 6.4% after announcing delays in filing its quarterly earnings report.

• Tesla added 0.5%, trimming earlier gains after President-elect Trump announced Elon Musk would lead the Department of Government Efficiency alongside Vivek Ramaswamy.

Yesterday, we looked at this chart of the 10-year yield.

Despite 75 basis points of easing from the Fed since September, bond yields have moved aggressively higher, not lower.

We came into the morning's October inflation report testing the trendline. The inflation number did nothing to change the rate path for the Fed (i.e. trajectory lower), but yields finished higher on the day, again.

Now the benchmark 10-year yield is trading above the election day highs — to the highest level since July 1st.

In my note yesterday, we talked about Scott Bessent's view on the bond market risk. I was mistaken in saying he was formally named Trump's Treasury Secretary nominee. He wasn't, but he's the likely nominee (maybe named today).

Let's continue the discussion on his concern about the current Treasury Secretary's management of the economy, in a way that trades short term gain (in an attempt at political gain) for medium and long-term economic pain — leaving the pain for the new administration.

As you can see in the right side of the chart below, the government has been funding the largest deficit spending in peacetime history, by issuing an unusually large proportion of short-term debt (Treasury bills, the blue bars).

By funding more of the deficit with shorter dated Treasury bills over the past year, Yellen paid more to borrow, as short term rates were higher than long term rates (an inverted yield curve). 

But by focusing on Treasury bills, and limiting the increase in longer-term bond issuance, Yellen was able to influence longer-term interest rates lower or prevent them from rising further.

Bessent has made the case that this looks like Yellen purposely manipulated financial conditions through this strategy to "goose the economy."

Now, for the new administration, these short term Treasury Bills will have to be refinanced, creating risks for rate volatility and "the potential for a financial accident."