Yo Pit Crazies,
I didn't expect to see this one.
Hedge fund legend Stanley Druckenmiller and Treasury Secretary Scott Bessent, also a hedge fund guy, are taking swings at each other in public.
Druck used a Wall Street Journal op-ed to call Treasury's bond buying a mistake, and Bessent answered on CNBC Monday that his old mentor changes his mind a lot and doesn't like losing money.
The whole fight is over four billion dollars.
Treasury doubled the ceiling on its long-bond buybacks to $4 billion per operation starting September 9th, and Druck's read is that the size isn't the point. Once the Treasury starts defending a price, traders spend their days hunting for the level where it hurts.
Below is where Bessent announced the bigger buybacks (BB) and where Druck answered him (GF).
TLT 30 day chart
That turned Friday's small rally in bonds into a two-day selloff that dragged other governments' debt down with it.
Japan's 10-year yield crossed 3% Tuesday for the first time since 1996. The 10-year gilt in the UK hit 5.25%, its highest since June 2008.
For all of that, the S&P 500 has given up about seven tenths of one percent across the two sessions. Considering the size of the mini-crisis, that isn't much of a selloff.
Add the shooting war back on in the Persian Gulf, with a supertanker hitting mines in the Strait of Hormuz and Brent over $91, and the bears have plenty to work with again.
SPY 30 Day Chart
The SPDR S&P 500 ETF Trust (SPY) is dipping back into the big rally we had at the start of August as the Mag 7 struggles to hold a bid. Interest rates are a real part of the AI buildout, and higher ones are the last thing the hyperscalers want.
Fear is Still Cheap
The VIX curve is in contango, meaning near-term volatility trades below the later months (traders expect calm for now and pay up for protection further out). The September VIX future jumped about half a point. Vol traders aren't pricing a crisis yet, and they can change their minds in a hurry.
VIX futures curve Aug 31 and Sep 01
The last real sovereign debt scare was in 2011, when I first joined Mark at Option Pit. It took months of wrangling with Greece over its spending before that one cleared, and VIX traded above 24 for most of it. The Greeks did eventually cut, and their economy is one of the better stories in the Mediterranean now.
Traders will price our version in fits and starts while they guess how long it takes.
An end to the Iran conflict would help on the oil side and on the spending side. Until then, Bessent keeps doing things that make Druck mad.
The Anthropic road show lands this month and it will change how everyone looks at this tape. We put together "Anthropic at the IPO" for exactly this.
We’ll have more details on it tomorrow, so stay tuned.
Hopefully this was helpful,
Andrew