Trading Day: Stocks, bonds in delicate dance 

By Jamie McGeever

ORLANDO, Florida, Oct 7 (Reuters) - A sea of red swept across global stocks on Wednesday as the bond market selloff picked up again and lifted long-dated US yields to 24-year highs, although a strong 10-year Treasury auction and minutes of the Fed's last policy meeting eased some of the upward pressure on borrowing costs.

In my column today, I ask how much longer Wall Street can continue scaling fresh peaks while the bond market rout continues to push yields ever higher. It will depend on whether rising borrowing costs reflect strong growth expectations, or other risks captured by the 'term premium', which is now racing higher also.

Today's Key Reads

• Fed policymakers divided over rate-hike logic in September, minutes show

• Investors pick new darlings and duds as selloff rocks Europe's bond market

• India joins global rate-tightening wave with first hike in nearly 4 years

• IMF chief warns energy shock, growing debt and AI risks threaten global growth

• Hedge funds warn BoE repo reforms could backfire

• Today's Key Market Moves STOCKS: Japan -1%, South Korea -2%. Europe -1%, UK -0.8%. S&P 500 and Nasdaq -0.2%, Dow -0.7%.SECTORS/SHARES: Seven sectors on the S&P 500 fall, four rise. Industrials -2%, healthcare +1%. Caterpillar -6%, SpaceX -2.6%. Moderna +5%, Micron Technology +4%.FX: US dollar back up to Monday's 17-month high, euro at 17-month low. Euro/sterling down for 9th day, longest losing streak since Feb 2021.BONDS: European bonds back under pressure, French/German spread widens 10 bps to 138 bps. US 10y and 30y yields touch fresh 24-year highs but cool after 10-year auction draws highest demand since 2016. US mortgage rates highest since 2023.COMMODITIES/METALS: Oil slips - Brent -0.5%, WTI -1.3%. Gold -1%, other precious metals -3%.

Today's Talking Points:

United yet divided

We know that the Fed's decision to raise interest rates last month, the first hike in three years, was unanimous. What we learned from the meeting minutes published on Wednesday is policymakers were divided on the rationale for raising rates. Some saw it as a precautionary move to cool energy-driven price pressures or inflation expectations, others saw it as the first step in a battle against demand-driven inflation.

This matters because it suggests there will be less certainty and unanimity at upcoming decisions, starting with the October 28-29 meeting. The Fed rarely does "one and done" rate hikes, so it's reasonable to assume there will be more tightening to come. But how much more, and the pace, are up for more debate. This may be what Chair Kevin Warsh wants. Market pricing suggests a rate hike this month is off the table, but remember, only a week ago it was very much on the table. Three weeks is a long way away.

Term premium

Fed officials — and policymakers elsewhere — will surely be looking at the bond market with an increasing sense of nervousness and unease. If the rise in yields is a function of investors pricing in strong economic growth driven by demand and investment, that's one thing. If it's because of inflation fears, that's another. But if it's being driven by the 'term premium' — the extra premium investors demand for general 'risk' — then that's more worrying.

And the US term premium is beginning to rise. Rapidly. It has surged 40 bps in the last two weeks, and on Monday hit a 12-year high of 96 bps. Bank of America analysts note that the term premium is also gathering force in other key bond markets, and suggest three key factors investors should watch in Q4: US fiscal and funding issues, ECB willingness to stabilize spreads, and long-end JGB dynamics.

AI spaghetti

The news that SpaceX is in talks with banks and asset managers to raise $40 billion to buy Nvidia's AI chips has shone the spotlight back on the debt, deals and spaghetti-like circular financing that's driving the artificial intelligence revolution.

Investors are trying to grapple with a surge in corporate bond issuance to fund AI data center construction and investment, more than $3 trillion of off-balance-sheet debt, according to Morgan Stanley, and the bilateral loans, leases and agreements between several of the big players. A growing number of investors, including veterans like Jim Chanos, Steve Eisman and Michael Burry, warn that the circularity and opacity of it all spells danger.

What could move markets tomorrow?

• Samsung earnings (Q3, prelim)

• European Central Bank chief economist Philip Lane speaks

• Bank of England chief economist Huw Pill speaks

• US Treasury sells $22 billion of 30-year notes at auction

• US Federal Reserve officials scheduled to speak include Governor Chris Waller, Minneapolis Fed's Neel Kashkari and St. Louis Fed's Alberto Musalem

Want to receive Trading Day in your inbox every weekday morning? Sign up for my newsletter here. Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

(Reporting by Jamie McGeever; Editing by Bill Berkrot)