US interest costs have quietly climbed to around 18% of tax revenues, up from about 5% not long ago. At Jackson Hole, Fed chair Kevin Warsh delivered what looked like a near 180 degree hawkish pivot from his July meeting, sending the two year yield up 11 basis points in a day. The long end barely moved.
Jonny thinks the pivot has less to do with inflation than pressure from the Treasury. Scott Bessent has been doubling bond buybacks and hinting at drawing on the $950 billion TGA to support long dated debt, and the two men meet weekly. A short end hike buys Bessent room to defend the long end without spending the Treasury's own firepower.
Elvis sits down with veteran macro trader Jonny Matthews, 25 years of institutional experience at Brevan Howard and Citigroup, to unpack why the long end didn't budge despite the hawkish pivot, what a September hike really says about debt sustainability, and why he still likes gold and short bonds as the trade.
In this episode:
Warsh's near 180 degree reversal, from downplaying inflation in July to calling 2% a "firm fixed target" at Jackson Hole
The two year yield jumping 11 basis points on the day, while the long end stayed exactly where it was
Fed funds futures pricing close to 90% odds of a September hike, up from around 60% before the speech
Why Jonny expects Friday's payrolls to beat the 55,000 consensus, after a seasonal 50,000 drop in government jobs last month
The 30 year Treasury yield at 5.25%, driven mostly by rising real yields rather than inflation
Break even inflation at 2.4%, up from a well anchored 2%, a sign of fiscal risk over price risk
Why shifting issuance to the short end risks repeating what happened in Turkey's bond market
Interest costs near 18% of tax revenues, and why debt sustainability is now a G7 wide problem, not just a US one
Jonny has spent 25 years trading macro at the highest institutional level. This is not retail speculation or headline chasing. It is rigorous, independent analysis from someone who has sat at the table.
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0:00 Intro: did Warsh just kill the debasement trade
0:50 Warsh's hawkish pivot at Jackson Hole, and the 180 from July
1:53 Bessent's TGA hint, the doubled buybacks, and mixed signals from the Fed
3:17 The political trade off: a short end hike to save the long end
3:54 Line by line: what changed between July and Jackson Hole
6:04 Why short term rates are a blunter tool than they used to be
7:18 The labour market case: stable claims and the high frequency data
9:19 Why Jonny expects Friday's payrolls to beat the 55,000 consensus
11:12 The committee split, and fed funds futures pricing near 90% odds of a hike
13:36 December's dot dispersion, and whether it's one hike or two
14:24 Can the economy handle a 50 basis point hike
16:17 Why hiking still won't bring the long end down
17:01 The real driver of long yields: debt sustainability, not inflation
18:11 Break even inflation at 2.4%, and the purchasing power problem
21:27 Shifting issuance to the short end, and what happened when Turkey tried it
23:44 The chart showing fed funds and the 10 year yield decoupling
24:40 Borrower or lender: the devaluation bet, and the trade Jonny holds
28:14 Wrap up: interest costs at 18% of tax revenues, and the G7 wide problem
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