The market says there’s about a 90% chance the Fed hikes Wednesday.

I don’t think they’re going to do it.

And before you tell me that’s a bold thing to say two days out, hear the reasoning. This has nothing to do with guessing at what Warsh wants, and everything to do with what the bond market has already done without him.

Yields are at the highest levels since around 2006. Treasuries are pushing 5%. And almost nobody is asking the obvious question about why.

Once you understand the answer, the case for a hike gets a lot weaker than 90%.

The trade drops Wednesday at noon, and I’ll walk through the whole thing below.

Think about who is trying to borrow money right now.

AI-related debt issuance is on track to approach $570 billion globally this year, more than double last year. Total AI-linked debt has already passed $1.2 trillion, which makes it the largest single sector in the investment grade market.

And the reason they are in the bond market at all is worth understanding. Hyperscaler capital spending is consuming close to 100% of operating cash flow this year, against a ten-year average of about 40%. The spending outran the cash, so bonds fill the gap.

Meanwhile the US Treasury needs roughly $2.04 trillion in fiscal 2026, and primary dealers expect it to stay above $2 trillion through 2028.

So you have an enormous amount of demand for capital showing up at the same time, chasing a finite pool of lenders. What is supposed to happen to the price of that capital?

It goes up. Interest rates should be higher. That is not a policy failure, it is arithmetic.

The Bond Market Is Already Doing The Job

Now the bit that changes the argument.

A central bank raises rates to tighten financial conditions. Make money more expensive, slow things down, take some heat out of the system.

Go look at what has already happened without them. Bond prices are falling, yields are pushing 5%, and financial conditions have tightened considerably over the last few weeks.

The bond market did that on its own.

So when I look at Wednesday, the same thing keeps landing. They don’t need to raise, because the tightening they would be trying to create is already in the price.

I could be wrong on this, and I want to be clear about that. But I think the Fed surprises everybody.

Why This Was Always Going To Happen

I want to zoom out for a second, because people are treating high yields as a crisis and I don’t read them that way.

Go pull up a long chart of the TLT. There was a period where that thing traded around 170 with interest rates at effectively zero, and everybody acted like that was the normal state of the world.

That was the aberration.

Rates being that low for that long, while we borrowed as much as we did at those levels, was the strange part. What is happening now is the market correcting back toward something that makes sense.

And the bond market will keep doing that whether anybody likes it or not. It has taken out more governments than howitzers ever have, because politicians have no control over themselves and bond prices eventually tell everybody what to do.

The US government has unsustainable debt and is still spending like we are in the middle of the COVID crisis. At some point that reality arrives. I do not know when, and neither does anybody else.

What Wednesday Is

This is the first real test of a Fed chairman who has been in the job a couple of months.

Everybody is positioned one way. The odds are somewhere between 86% and 90% for a quarter point. That is about as one-sided as this market gets ahead of a scheduled event.

Which is exactly why I think it’s a massive opportunity to trade around, regardless of which way it goes. When a market is this convinced of something, the interesting outcome is the other one.

The trade drops Wednesday at noon, and I’ll be in the live session putting it on in my own real-money account while members follow along.

The offer closes at the same time.

→ Get in before Wednesday at noon

Andrew Giovinazzi 

P.S. If the Fed hikes and everybody was right, that is a perfectly fine outcome for the position.

The structure does not require me to be correct about Warsh. It requires the market to move, and across nine years of data the market has delivered the move I need 96% of the time. Wednesday is not a day I have any concerns about on that front.