The 10-Year Hit a 24-Year High. Nobody Is Buying Puts. Are You Watching the Wrong Market?

Episode Summary

Executive Summary: The episode focuses on the sharp rise in long-term interest rates, the market’s surprisingly complacent reaction, and a second inflation risk coming from diesel and refinery constraints. Andy Constant argues higher yields reflect strong growth, capex, and deficits more than a bond crisis; Brent Kachuba says options positioning is skewed toward betting yields fall and equities rise; Eric Pachman warns diesel tightness and crack spreads may push inflation higher later.

Main Topics: Drivers of the rise in long-term interest rates (Priority: 5/5): Andy Constant explains that stronger growth, AI-related capex, persistent fiscal deficits, and hawkish Fed signals are pushing the long end higher. He views this as more a repricing of growth than an immediate crisis. Bond market outlook and portfolio positioning (Priority: 5/5): Constant becomes more constructive on bonds after the selloff, seeing them as more useful in long-term portfolios and as a tactical long, though he does not expect a major bond rally unless growth weakens. Options market complacency and tail risks (Priority: 4/5): Brent Kachuba describes an options market that is not pricing in equity downside. Instead, traders are piling into call structures and trades that benefit if yields fall, even as rate volatility rises. Diesel squeeze and inflation pass-through (Priority: 5/5): Eric Pachman argues refinery constraints and low diesel inventories are creating a structural supply problem that could feed through to freight costs, consumer prices, and CPI later than many expect. Why equity markets remain calm despite macro stress (Priority: 4/5): The discussion highlights that realized and implied equity volatility remain muted relative to the bond and commodity shocks, suggesting investors have not yet fully hedged the possibility that higher rates hurt risk assets. AI spending, adoption, and market implications (Priority: 3/5): In the closing segment, the hosts discuss how AI capex is stimulative now, but the pace of model releases, adoption, efficiency gains, and possible slowdown could materially affect growth and market leadership.

Key Arguments: Long-term yields are rising because markets are catching up to stronger growth expectations, AI-driven investment, and persistent government borrowing needs rather than because the system is in crisis. The bond market crisis narrative is overstated for now; higher yields can persist without immediate financial instability. A higher-for-longer rate environment can coexist with decent equity returns if growth remains strong, but sustained 5%+ long rates are unlikely to support a fresh equity acceleration. Bonds have become more attractive after the selloff, both as a portfolio diversifier and as a tactical long if growth eventually slows. Options positioning suggests investors are betting on yields falling and are not positioning aggressively for an equity drawdown. Volatility in rate-sensitive assets is elevated, but equity investors remain relatively complacent, implying under-hedging versus a potential macro break. Diesel markets are structurally tight because of refinery physics, inventory patterns, and supply-chain disruptions; this can create delayed inflation pressure even if crude oil eases. Higher diesel prices can filter into freight, logistics, and consumer goods, adding upward pressure to CPI and worsening pressure on lower-income households. AI’s market impact is two-sided: current capex spending is stimulative and inflationary, while future productivity gains depend on adoption and may take much longer to appear. A slowdown in AI model advancement would not stop spending immediately, but it could alter the expected return on that spending and change equity leadership.

Data Points: 10-year Treasury yield change in September: 4.75% to 5.29% (+54 bps) - Cited as the key move driving discussion about higher long-term rates. 30-year Treasury yield change in September: 5.25% to 5.64% (+39 bps) - Used to show the magnitude of the long-end selloff. Largest rate increase since: 2022 - Describes the September move in long-term yields. Improvised growth tolerance from the Fed: ~50 bps - Referenced from a prior Rosenberg discussion about how much leeway the market had given the Fed. Tactical bond position size: ~3% of portfolio - Constant described a speculative long-bond bet sized modestly within his portfolio. Fed/market pricing on hikes: More than one hike priced by 2026 - Constant described the market as pricing a higher-for-longer path. TLT implied volatility rank: 100 - Kachuba said TLT vol had hit the top of its historical range. VIX level: 16 - Used to highlight how calm equity volatility remains despite bond volatility. SPX realized volatility (1 month): Around 9-10 - Kachuba noted one-month realized equity vol stayed unusually low. Gulf Coast crack spread: $85 - Pachman said the crack spread had surged to crisis-like levels by month-end. Diesel inventory seasonal backdrop: Deeply below seasonal norms - Pachman argued inventories should have been building over summer but were not. Diesel inflation pass-through estimate: 0.5 percentage points - He estimated a sustained diesel spike at current levels could add about half a point to inflation over a year. Home health and personal care aides in NYC metro: 644,000 - Used in the wage-inequality discussion to illustrate low wages in expensive metros. Example wage for home health/personal care aides: $41,000/year - Illustrates the mismatch between wages and local cost of living.

Pivotal Quotes: "There is not a bond market crisis at the moment. Nothing is in crisis." — Andy Constant: He pushed back on alarmist narratives about the long-end selloff and stressed that current moves are not an existential funding event. "People are not positioning for downside in equities at all. Instead, they are all kind of piling into trades that are going to make money if the yields start to come off." — Brent Kachuba: He summarized the options market’s apparent complacency and its bias toward a bond rally and equity upside. "If we understood the physics and functioning of a refinery, we would not be so complacent right now." — Eric Pachman: He warned that diesel and refining constraints are more serious than markets are currently pricing.

Implications: Investors may be underestimating both rate-driven equity risk and delayed inflation from diesel. The near-term market can still grind higher, but higher-for-longer rates and supply-side inflation could force a fast repricing in Q4.