I. A Month of Opportunities
"The Waste Land" is a poem by T.S. Eliot. It opens with the line, "April is the cruelest month." Apparently, Eliot never managed a stock portfolio. Everyone in the stock market knows that September is the cruelest month for stocks (chart). But when it is a bad month, it tends to create buying opportunities for a year-end rally that often starts in October.
What could possibly go wrong in September? Investors are already freaking out about rising bond yields worldwide (chart). The fear is that the Bond Vigilantes are on the loose and driving yields higher in protest over large government deficits, mounting government debt, and rapidly rising government interest costs. In addition, oil prices remain elevated and are fueling inflation. This is all putting pressure on the major central banks to raise their official policy rates.
We share the Bond Vigilantes' concerns, but we aren't convinced bond yields are, or will soon be, prohibitively high. True, they are back to levels seen before the Great Financial Crisis (GFC). But that's because they are normalizing after a long period of abnormally low bond yields following the GFC, when central banks were rigging bond markets.
Since the lows of the Great Virus Crisis, yields in the major overseas government bond markets have mostly recovered and converged to their respective national nominal GDP growth rates (chart). As we've recently observed, in the US, nominal GDP rose 6.6% y/y during Q2-2026, while the 10-year Treasury yield is 4.80% this evening. If it hits 5.00%, we expect strong demand for the bond, including from Treasury Secretary Scott Bessent. He'll issue more Treasury bills to buy back bonds if necessary to avert a selling panic.
II. JOLTS
