Summary of the Key Points
This article uses the metaphor of "moderate care" when harvesting ganba mushrooms to analyze the root causes of the current fluctuations in the global bond market. The U.S. Treasury Department (Bensen) has attempted to intervene in the yields of long-term government bonds, only to achieve the opposite effect. The hawkish statements from the Federal Reserve (Wash) have intensified expectations of interest rate hikes, while their mentor, Druckenmiller, has stepped forward to criticize this excessive intervention, emphasizing that the market should naturally reflect the underlying economic fundamentals. The core issue is the balance between "policy intervention" and the "market's own logic"—just as a mushroom farmer should only block the pine needles and not squeeze the mushrooms themselves, as over-intervention can damage the market.
1. Why Did Global Long-Term Bonds Plunge in Value in September?
On the first day of September, the yields of global long-term bonds suddenly rose (indicating a decline in bond prices as investors sold them). There were three main reasons:
- Japan May Raise Interest Rates: The yen fell to its lowest level since the government's intervention in July, leading the market to expect a rate hike by the Bank of Japan in September, prompting selling of Japanese long-term bonds.
- Inflation in the Eurozone Increased: Inflation in the eurozone reached a three-year high in August, giving the ECB's hawks (those advocating for rate hikes) more reason to act, and eurozone long-term bonds were also sold.
- Expectations of U.S. Rate Hikes: The market's main concern was whether the Federal Reserve would continue to raise interest rates; fluctuations in other regions were merely secondary factors.
In short, investors were afraid of rising interest rates, so they sold their long-term bonds, causing yields to rise.
2. Why Did the U.S. Treasury Department's Efforts to Suppress Interest Rates Backfire?
U.S. Treasury Secretary Yellen has been very active recently, buying back government bonds, focusing on issuing shorter-term bonds (reducing the supply of long-term bonds), and even considering stopping the issuance of ultra-long-term bonds, with the aim of lowering long-term bond yields (given the upcoming midterms and the impact of high yields on the economy and election outcomes). However, these actions triggered the "Shirley Temple Effect":
The Shirley Temple Effect refers to the situation where the more you try to hide something, the more people become aware of it. For example, when Shirley Temple sued a photographer for removing photos of her mansion, the photos were viewed hundreds of thousands of times. The more the Treasury Department tried to suppress interest rates, the more curious the market became, leading to doubts about the U.S. government's ability to repay its debt and further selling of bonds.
3. Why Did Mentor Druckenmiller Speak Out?
Both Yellen and Wash are disciples of Druckenmiller, whose core philosophy is to avoid interfering with the market. Druckenmiller wrote an article in the Wall Street Journal (admitting it was possibly written with the help of AI), criticizing his disciples:
- The Market Is Not in a Crisis: The real need for intervention would be in situations where bonds cannot be sold or when there are catastrophic losses by institutions (such as during the 2020 U.S. debt crisis). Currently, market transactions are normal, so there is no need for intervention.
- The U.S. Economy Cannot Afford Low Interest Rates: U.S. inflation has not reached the target level for five years (remaining between 3-4%), unemployment is low, the deficit accounts for 6% of GDP, and debt has exceeded $40 trillion, with interest payments exceeding the defense budget by over $1.1 trillion. In any other emerging country, the market would already be demanding higher interest rates. However, due to U.S. intervention, interest rates have not reflected the true risks.
Druckenmiller's point is that the market was trying to communicate its needs (for higher interest rates), but the Treasury Department silenced it, which is incorrect.
4. The Conflict Between the Federal Reserve and the Treasury Department Confuses the Market
Federal Reserve Chairman Powell says, "We need to make market signals clear and not filter them." However, the Treasury Department is trying to filter these signals (by suppressing interest rates), while Powell's own hawkish statements (such as hints of rate hikes) are further confusing the market. It's like throwing large stones into Fuxian Lake:
The lake has its own logic (capital flows, inflation expectations), but with so many interventions (policy statements), it's difficult to determine whether the fluctuations are caused by the lake or the stones. The current market's volatility is unclear—whether it's due to real inflation pressures or panic triggered by officials' remarks.
5. The Ultimate Lesson from Ganba Mushrooms
When harvesting ganba mushrooms, a farmer uses a frame to block the pine needles without touching the mushrooms themselves, allowing them to grow well. The same principle applies to the market:
- Moderate Care Is Beneficial: Intervention is necessary in a real crisis (like in 2020).
- Excessive Intervention Is Harmful: Forcing interest rates down and distorting prices can prevent the market from accurately reflecting the economy, potentially leading to greater risks.
The article concludes that the market may have become smarter: the more you try to prevent interest rates from rising, the more investors will sell bonds, forcing you to stop intervening. This is the market's way of resisting excessive intervention.
In summary, this article uses a relatable metaphor to explain the complex dynamics of the global bond market: policy intervention must have limits; the market should not be treated as something that can be manipulated at will. Otherwise, not only will the market not be rescued, but the problems will become even more apparent.