Just wanted to share some thoughs about yields and bonds that ive heard recently that caught my eye, maybe get some feedback or different ideas. This in the context of 10YR yields that went from 3.7% to 4.2% after the FED made the 50bps. The FEDs mandate, as you all know, is to balance employment and inflation.

Employment:

Some of the climb in yields comes from the idea that the economy is strong, with the unemployment rate climbing to 4.3% in July and then dropping since. A Bloomberg columnist wrote an interesting piece that talked about the idea that unemployment rate hasn’t peaked yet, due to 3 factors that played a key role in the September report.

1. Hiring in the education sector after an earlier delay
2. Outsized election spending
3. Responses to natural disasters

According to her, the drop from 4.22% to 4.05% in the unemployment rate was almost entirely driven by a 785k increase in government jobs (3.6 standard deviation move), which was the second largest monthly jump in government hiring since January 1990. Meanwhile, other Jobs fell 355k and as a result, total employment rose 430k net according to household data. Some possible explanations for the unusual increase in government hiring could be:

• The fast hiring in education, probably due to a later hiring schedule.
• A surge in hiring related to the presidential election — campaign-related activity saw an unusual increase in federal-level protective services in several swing states and Illinois — added 200,000 jobs, by their estimate.
• Emergency personnel related to reconstruction after damage by Hurricane Beryl and wildfires likely contributed about 100,000 jobs.

By their calculus, without the election cycle boost and the impact from natural disasters, the unemployment rate would have been 4.23%. Their conclusion is that those effects should persist in a lesser way in October but start reversing in December and expect a 4.5% by EOY.

Inflation:

Now let’s turn to the actual inflation data, this is a breakdown from the components and their contribution to overall headline inflation:

https://preview.redd.it/zq6lqliy8dwd1.png?width=618&format=png&auto=webp&s=48544eba3867a6c022f19932a60b17dd876dabbb

As you can see here, Services is the one big component that keeps pushing inflation higher, with Core Goods and energy contributing negatively to inflation (meaning they are showing lower prices now). What’s in the Services category? Well I have this table cause I got too lazy to make another graph: (remember this are contributions to the overall level of inflation for that period)

https://preview.redd.it/5qekd4a09dwd1.png?width=887&format=png&auto=webp&s=5c5bbc31f7407fe9f315c0dd5644739e845dd5c9

Most of the inflation comes from Shelter, Medical Care Services and transportation services. Let’s talk about Shelter specifically. Everybody here knows that the housing market is nuts right now, there is not enough new supply to cover the demand, and the existing supply is locked due to the high mortgages. The idea here is basically that HIGHER INTEREST RATES WON’T alleviate this component, lower rates might help actually due to unlocking existing houses in the market.

Finally, last week we got retail sales that spooked some participants, but we already know that goods have been in negative territory for the last months so there shouldn’t be much problem there.

Trade:

Ive been shorting the TLT puts for a while, closed most of them when we got the 50 bps cut and then as we came down ive been adding. I did some of them too soon I think. Anyhow this are my positions:

• Long TLT shares
• Short Dec 20 puts, Strikes: $100, 95, 93, 90
• Short Nov 08 calls, $96.5 just to cover some of the long exposure

I think worst case I’d end up getting assigned a bunch of TLT into 2025 and going into the new year basically all in on TLT. I am getting worried tho because recently ive heard a lot of commentary about FED making a mistake with people like Stanley Druckenmiller shorting bonds with convincing arguments. I think thats why id like to hear your thoughts.

EDIT: I forgot something else, there is also the spread between the bond yields and earnings yields of the S&P which is right now at historical extremes, basically saying its more attractive than stocks.