State Industrial Policy (low BOND yields)
March 29, 2026 – Weekly comment
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Three souls are transported to the Pearly Gates to bear witness to St Peter.
The first one is approached by St Peter and asked for his IQ and occupation. Answer, 180, physicist. St Peter smiles and says, that’s splendid! We can discuss earthly advances in nuclear fusion and nano technologies.
The second says his IQ is 125 and he’s a geologist. St Peter is delighted and says they can have wonderful conversations about advances in LIDAR technology and how it’s reshaping current understanding of former cultures.
The third says his IQ is 75. St Peter: “What’d cattle do today?”
There was a guy on the CME trading floor; successful cattle trader, Jeff Silverman or something like that. Dress shirt and cinched silk tie under his pressed trading jacket (while most wore khakis and polos with tattered ties). Peppered hair impeccably combed. I never really interacted with him, and by no stretch do I mean to imply a connection with the joke above (Actually when I first heard it, the punch line was ‘bellies’, not ‘cattle’). I was though, standing right there when someone asked Jeff why he traded cattle instead of euro$’s. He said, “because I can count cows”.
Crystallization of the current theme of physical versus paper. Derivatives are piled on top of derivatives, but physical supply is key, as every ‘expert’ now reminds us.
Hard steepener to finish the week. On Friday 2/10 jumped almost 10 bps to 52.4, (3.912, -7.2 and 4.436%, +2.0). On Thursday I noted that 2/10 was right on the lows of mid-2025, and starting to strongly suggest a move toward possible Fed tightening. But Friday’s equity market weakness was likely the excuse to cover curve shorts or initiate longs. (SPX down 2.1% on the week). Thirty year bond closed just under 5% (net week chg +4bps). The high in 2025 was 5.094%, and in late 2023 the high was 5.112%. The chart looks to me like an upside breakout is in the cards. Indeed, a similar looking formation in German 10y bund HAS resulted in an upside breakout: late 2023 high was 2.996% and Friday’s level was 3.092%,
It’s quite easy to make a case for hoarding supplies and building inventories ( => inflation). Gone are the days of just-in-time inventory management and unlimited financial liquidity. I know I’ve mentioned this little vignette before, but years ago when I worked on the CME floor, there was a mini-mart newstand in the lobby. The lottery had built up to some preposterous number, and there was a small line of exchange clerks and traders buying tickets. A CME member was in front of me (I didn’t know him) and made his order, and the lotto clerk printed the tickets said it was $50. The buyer was exasperated and whined that he only asked for $5 worth, not $50. I interjected and said no problem, I would take the other $45. That guy took one quick suspicious look at me and immediately said NO…$50 was FINE. At that second the prehistoric pea-brain overwhelmed everything else: “I don’t want these tickets, but there’s NO FCKING WAY I am letting this guy get them.” At that second, he probably would have paid double. An instantaneous snap between calculations of value and price. That snap doesn’t last forever; human ingenuity eventually intervenes (perhaps not for that guy). However, in the world of macro bonds, it can last a LONG time, as witnessed by the ‘widow-maker’ years of JGB yields, when obvious deterioration of debt fundamentals presented an unassailable case for shorts. The proper description was not unassailable, but UNSALABLE (against BOJ buying).
Anyway there was a provocative substack by Dr Pippa Malmgren at the end of last week, talking about critical material chokepoints, and how the US had already anticipated some of the shortages and had secured supplies. This list includes natural gas, fertilizers, petrochemicals. She also highlighted fantastic new innovative companies working on modular nuclear reactors and new power sources, that would likely make Hormuz a much less important chokehold going forward. The point is (whether one agrees with the analysis or not) the stress of the current conflict is transforming ingenuity into new technologies. My takeaway is not to underestimate the planning capabilities of the US military and/or the new generation of entrepreneurs. Every day I see articles saying that Iran is ‘winning’ and has plenty of resources. I am not buying into it. I need to be able to count the cows.
An outlier thought occurred to me on Friday. These new technologies take lots of capital, for ultimate long-term (rather than month-to-month) results. In some cases outcomes can be thought of as existential: we need big LONG-TERM capital commitments, likely backstopped by the US gov’t. The administration has already proven a willingness to bend rules and force a heavy hand on domestic industry to meet national goals. When considered in this light, the apparently off-handed news item that companies may not need to report quarterly results fits hand-in-glove with the concept of US strategic industrial policy.
Imagine this scenario with Warsh coming in: Bessent and Warsh and the rest of the admin agree that LONG TERM financing rates are key. Warsh comes in and DOESN’T cut funds, but indicates that long bonds will be capped at 4.75% or lower for the forseeable future. Normally one might think the admin wants a weak USD. But the paradigm has changed. DXY is already above 100, but without the prospect of FF easing, it quickly rallies to 105. The US is no longer concerned about selling product overseas, it’s concerned about securing long term supplies and WANTS a strong dollar. Using low long-term rates to build strategic long term companies and secure US supplies. It’s perhaps the ultimate juxtaposition between Trump’s daily impetuous proclamations and a really long-term strategic state policy. I guess we’ll know by watching Kalshi bets.
Is the idea worth a trade? Probably small odds. But I can see owning EUR 105p. Implied vol is jacked, perhaps worth selling US puts, but likely too early. As I mentioned, the yield charts indicate higher, and vol will go with it in the short term.
Tuesday is quarter end and Japan year-end. Retail Sales and ISM Mfg Wednesday. Payrolls Friday expected +60k.
| 3/20/2026 | 3/27/2026 | chg | ||
| UST 2Y | 390.2 | 391.2 | 1.0 | |
| UST 5Y | 400.9 | 406.8 | 5.9 | |
| UST 10Y | 438.2 | 443.6 | 5.4 | |
| UST 30Y | 494.0 | 498.0 | 4.0 | |
| GERM 2Y | 266.9 | 267.0 | 0.1 | |
| GERM 10Y | 304.1 | 309.2 | 5.1 | |
| JPN 20Y | 311.6 | 325.5 | 13.9 | |
| CHINA 10Y | 183.6 | 181.4 | -2.2 | |
| SOFR M6/M7 | -6.0 | -3.0 | 3.0 | |
| SOFR M7/M8 | -17.5 | -14.5 | 3.0 | |
| SOFR M8/M9 | 11.5 | 13.5 | 2.0 | |
| EUR | 115.72 | 115.09 | -0.63 | |
| CRUDE (CLK6) | 98.23 | 99.64 | 1.41 | |
| SPX | 6506.48 | 6368.85 | -137.63 | -2.1% |
| VIX | 26.78 | 31.05 | 4.27 | |
| MOVE | 108.84 | 111.95 | 3.11 | |
