Betting Against The House?

By Bas van Geffen, Senior Market Strategist at Rabobank

Brent futures broke through $100 per barrel after a series of attacks in the Middle East raise concerns that the conflict could intensify again. Iran said that it is ready to escalate its counterstrikes if the US continues to attack its territory and infrastructure. Parliament speaker Ghalibaf warned that Iran’s next targets are US oil and gas company assets in the region. The Houthis already struck energy facilities in Saudi Arabia in a direct response to the US attacking several Iranian oil tankers.

Adding to the energy price pressures, the European gas benchmark briefly surpassed €80/MWh. Ukrainian drones forced closures at Russian ports. Moreover, Russia’s TASS news agency reported a fire at the Yamal energy site. TTF futures receded to €79 on reports that the LNG terminal was not damaged in the strikes.

Nonetheless, the fact that Ukraine is now targeting gas facilities deep inside Russia’s territory creates substantial risks for the European energy outlook. The Yamal facility is a major LNG production and liquification plant, and a key supplier to Europe. It shipped almost 10 million tons of LNG to the EU in the first half of the year.

These renewed energy price pressures add to the inflation concerns that have been weighing down global fixed income. The 10-year Treasury yield rose to 4.83% and the 30-year bond touched 5.30%, testing Treasury Secretary Bessent’s pain threshold ahead of a bond auction today. When the 30-year yield surpassed 5.30% in August, Bessent announced an expansion of the Treasury buyback operations, which effectively changes a liquidity management tool into a potential instrument for market interventions.

However, this week’s operation disappointed. Yesterday, the US Treasury announced that it will buy back $6 billion in longer-dated Treasury notes today. Although that is three times the normal size, the operation is at the lower end of the $5-8 billion that the market had expected. So, Bessent may have warned yen traders that “he is the house now […] and you can bet against me if you want,” but fixed income traders are still testing how deep the house’s pockets are, and if he is willing to spend it all.

The White House, meanwhile, seems more than willing to spend. President Trump promised a $5,000 “dividend” to every adult US citizen if the Republican party retains control of both houses of Congress. The plan emphasises the pressure that Trump –who denies voters face an affordability crisis– is under ahead of the midterm elections.

Based on Census Bureau population estimates, this promise would cost upwards of $1 trillion. Not only would that add to the $40 trillion in existing debt, but it could also exhaust all the room left until the US hits the debt ceiling – adding to the default risks. However, Congress would have to approve Trump’s plan and his previous “tariff dividend” also failed to gain support on Capitol Hill. 

Indeed, Republican senators are already trying to modify Trump’s plan.

So, investors largely shrugged off Trump’s idea as unlikely to happen. Yet, the uncertainty may still add to US term premia at the margin, at a time when markets are already testing the Treasury Secretary’s resolve.

Rising yields are forcing difficult decisions everywhere, as governments face higher interest bills and deteriorating public finances. Choices can be politically expensive, but not making any choices will cost hard currency.

UK Prime Minister Burnham told said that “national security cannot come at the expense of social security.” Yet, it must be paid for somehow. The prime minister suggested he would get the welfare costs down “the Labour way,” that is, by reforming and changing the system instead of simply cutting benefits.

Burnham promised to present a sound plan, but the added fiscal uncertainty weighed on Gilt yields, at a time when global yields are already rising. This is not quite a Liz Truss moment, but the 30-year yield rose 7 basis points on the day.