Buyback of Bonds Backfires
Strong oil and weak bonds continued to pressure the market on Wednesday. Breadth was abysmal at 27% gainers and the list of new 12-month lows ballooned to around 250 names versus 70 at new highs.
The weak action was reflected primarily in the Russell 2000 ($IWM) with a drop of 1.4% and a close near the lows of the day. The other indices managed some late-day recovery and milder losses. The Nasdaq 100 ($QQQ) was down about 0.3% and the Magnificent Seven actually had a small gain due to strength in Meta Platforms ($META), which rose on the launch of its Muse personal AI agent.
The most positive thing I can say about this market is that the senior indices held up fairly well, but there is clear corrective action taking place under the surface.
Buyback Backfired
The biggest negative on Wednesday was the response to the Treasury bond buyback. The Treasury announced it will buy up to $6 billion in 10- to 20-year bonds on Thursday, triple the size of its last long-dated operation and at the top of what Wall Street expected. The market immediately dumped anyway. Stocks extended their losses after the announcement and bonds slid, with the iShares 7-10 Year Treasury Bond ETF ($IEF) hitting its lowest level since January 2025.
That is the worst possible reaction to a support operation. The government tripled its bid for its own debt and yields went up. It tells you the bond market has decided that the buyback is a sign of how much trouble the long end is in rather than a solution to it, and that no amount of Treasury buying is going to offset foreign buyers stepping back and $1.5 trillion of AI debt competing for the same money.
The bearish bond action also suggests that market players are not hopeful about the PPI report on Thursday or the CPI report on Friday. Odds of a quarter point Fed hike on September 16 are still around 60%, but that will likely change dramatically after CPI.
Iran Did Not Help
Iran targeted a U.S. base in Jordan and attacked ships after the U.S. destroyed five Iranian tankers on Tuesday. Oil held near $100. There is nothing in the news flow that suggests this is heading toward a resolution, and every day it continues is another day the oil premium sits in the inflation numbers that the Fed is about to see.
RBC published a note today giving three reasons the S&P 500 could drop as much as 10% in the near term. I do not put much weight on index targets, but it is interesting to see a specific downside call in the middle of an ugly correction like this. It is definitely a change in tone from the summer.
Game Plan
I have no interest in betting on the outcome of the CPI report, and even if it is soft, the bond market may not be convinced inflation is cooling. It is a difficult market environment right now, and the best course of action is to simply wait and see how things develop.
The good news is that this kind of action creates great opportunities. That doesn’t do much to relieve the sting of the losses you are suffering now, but it is a reminder to free up some cash so you have flexibility. This does not look like a market that is about to make a sudden turn, and make sure you are wary of any bounce action at this point.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
