the recession hasn't been canceled. The global economy is still heading for its bad ending. Yet, I expect interest rates are going to go up. The Federal Reserve is still going to cut rates at its next meeting in September. Growth and inflation expectations continue to be solidly negative, and all the trouble spots that we thought were trouble before have only been increasingly confirmed as being even more trouble now. So, why would I expect interest rates to rise? After all, everything I just said adds up to lower growth in inflation, plus you throw in a fair chance for flight to safety, a few hints of collateral, and all of that is just what lower bond yields are supposed to mean. But while that's true, it's also August 17th, and that can only mean it's now September. Bond yields already retreated pretty sharply on Thursday, though it wasn't necessarily because the market believed differently from anything I just said. There was a whole deluge of data from around the world, not just US retail sales or jobless claims. I talked about the stuff from China. Most of what

was released. Was at best the same meaning heading for the bad ending, but all those negatives were cast aside in one part because expectations had been reset by events that started earlier this month. After the huge move in every market, there's always going to be a near-term backlash, but more than that, the September effect is lurking here in the background, and it has consistently biased interest rates higher six years in a row, sometimes times by a whole lot. So, it's absolutely critical here to factor its effects at what is a really important moment in the current period where we need to be right on when it comes to interest rates. But what is it? What can we say about it? What can we learn from past experience? What does it all mean? It's a lot of questions, and fortunately, we have a lot of answers. One thing that we can't answer, though, is what originally got this thing started. But before we get to that, let's step back and look at the bond market as a whole. Up until now, it is performing exactly along the lines of its

historical pattern. Just as we have expected, there was the massive rally last year that ended on December 27th. And as I said, it led to a multi-month pause where rates would go slightly higher to sideways over that period. And it took about four months through the end of April. And during that pause, everyone said they looked at the bond market and they said the bond market had changed its mind. But instead, what was happening was market participants were consolidating, seeking confirmation for all of the fears and all of the expectations, lower growth and inflation expectations that had built up during last year's rally. So while everyone was stuck on sticky inflation, rates were already moving into that next phase, the next leg of the rally. And so far, that's right on with the pattern, the next leg lower that began in the middle of the year, which is something we're going to come back to repeatedly, as we'll see here in just a moment. But see, now it's already mid-August. The bond market has made a big move from here earlier in the

month, which means we've got a couple of different things happening. We're still consistent with the historical pattern, but now we're running into September. As I said, I don't really know where the September effect came from. I don't really know what's behind it. A very astute EUR doll University member offered up a couple of years ago that maybe this isn't even just a US thing. It could be a regulatory issue. It could be something about China or some outside influence or foreign bond holder, money holder, something outside the United States. It may not even be specifically about the US or US treasuries. I mean, who knows what it really is? And after six years of this, I still have no idea what however got started though. One plausible explanation for why it continues to be such a big factor is that as market participants become more aware that the September effect happens every September, speculators in particular get to jump all over it. So everybody knows interest rates go up in September for reasons that we can't really identify, and so you

start shorting bonds maybe in August, anticipating that rates go up, and then you stop shorting bonds when we get to the end of September and into October. And as more people are aware of this effect, it becomes sort of self-fulfilling, and it also starts to extend on both ends. People start shorting bonds even earlier in August to get ahead of what they know will be a rise in interest rates during September, and they don't start to cover their shorts and start to go long in bonds until maybe later in October if the rally gets extended or the selloff gets extended even further. So overall, this September effect ends up being not just September; it starts in August, sometimes very early August, and last year started in late July. So we got August, September, and into October in one case; it all added up going all the way into November, whatever it is, and however it takes in any individual year. What we know for sure is that around September, rates go up substantially regardless of the

underlying conditions or what's happening in the economy or the marketplace. And as we'll see as we go through the review here, sometimes they're very different circumstances, yet the result is almost the same every time. I first noticed the September effect way back in 2019. If you remember, 2019 interest rates were moving lower after, again, a big rally the previous year. The landmine in 2018 economic concerns were everywhere. There was funny stuff going on in the money marketplace, which of course the Fed and mainstream all focused on bank reserves when we could see collateral indications clear as day. Dealers were starting to hoard collateral. Long story short, especially when you add the Federal Reserve rate cuts in there too. Long story short, everything in August and September of 2019 added up to rates going down. Everything said, Hey, rates should go down from here. But yet the opposite happened. The US 10-year Treasury yielded 1.47%, which I believe up until that point was a record low. And that was

August of 20 August 28th of 2019 1.47% was an incredible low. The FED had already cut rates at the end of the previous month, at the end of July. The 2-year tenure spread had just inverted. We're talking about recession, rate cuts from the FED, economic weakness all around, recession risk all around the rest of the world. So, lower rates made sense from there. But while the tenure would hit 1.47 again at the start of September, September 3rd and 4th, just a week later, September 10th, it was already up to 172. So, okay, I mean, short-run fluctuations being what they are, you could kind of chalk that up as to something else. I mean, it could be anything in the marketplace, but still, that was a pretty strong setback. And then by September 13th, which was a Friday, the 10-year was up to 1.9%. Now, some people said this was just, I mean, the ECB had just restarted

QE, so this was easing, and obviously that was going to lead to higher growth and inflation expectations. So, the market was pricing that, and I don't think the markets don't really pay much attention to the ECB or the Fed or QE all that much anymore anyway. So, and that not only that, it wasn't a surprise back in September of 2019. Everybody knew what the ECB was going to do, and everybody knew when the ECB was going to do it. So, that didn't really explain the pretty substantial backup. So, we already had the September effect in the first half of September, and then the Monday after September, September 16th, which was another September thing that we'll get into at the end of this video. September 16th, you had the repo Rumble, repo rate skyrocketed, and even federal funds rate skyrocketed too, or at least they moved above the federal funds target range, which was the first time that it ever happened. And then rates started to fall down from there, but even so

um, the whole thing just seemed very odd. Rates shouldn't, at least by fundamental account, I mean again, every you never known a short run, but you look at it from a fundamental perspective. In 2019, rates should have continued to go lower. You could argue that they gotten too low and it was just adjusting, but given everything that unfolded from there, even before we get to 2020, it didn't, it seemed at least a little odd and something, something didn't seem right about it. And that was made all the more um, more all the more noteworthy because we had seen something similar happen the year before in 2018, the very first very solid September effect. There was a little bit of one in 2017, but to in my view, the September effect became more completely more complete and well-defined in 2018. Initially, it didn't seem out of the ordinary given what was going on in 2018. While you still had some concerning warning signs, you know euro dollar futures had inverted just a couple months earlier, the economy didn't seem

nearly as strong as everyone said. So, there was a the yield curve itself was being pressured higher at the front end because of the aggressive rate hikes, or at least what was considered aggressive back then from the Federal Reserve. Jal inflation fear, strong economy, strong labor market, all that stuff. So, the short end was rising, yet the long end of the yield curve wasn't really rising all that much, and the yield curve itself was flattening out. So, there was a concerning thing there. But when the September effect showed up in August of 2018, it didn't seem at all out of place, and it really didn't. It wasn't something that you would focus on and say, This isn't right, because it was at least consistent with some of these things that were going on during that period. What we see is that in August 20th, 22nd, 23rd, and 24th of 2018, the 10e got down to 2.82%. And this is something we're going to keep coming back to as well as I

already mentioned bond yields tend to rally in the late spring into the summer until we get to August and September. We'll keep coming back to that over and over again too. So, but August of 2018, the 10-year gets its low at 2.82%. And by the middle of September, it's up to 3.05, which is not a huge move, which is consistent with that period. It would end up getting as high as 3.23% on October 5th, so a little bit after September. But then from there, it would go sideways to slightly higher and then peak in November before the major rally 2018 into 2019. We also have to keep in mind here too, I'm going to focus just on US treasuries for the sake of time and not just going over everything. But this is not just a US Treasury thing. This is not a US thing. This is a global bond phenomenon. You can see the September effect really

well in other markets just as well in other markets, whether they be German bonds or even JGBs. You look at the September effect; it also shows up in 2018 as well as 2019. So, globally synchronized repeating September effect pattern, which again suggests it's not just about something US specifically, US or specifically US treasuries. There is a monetary banking thing at heart here; that's what I believe it is. And I think it's spilled over into the bond market as a whole, where after 2018 and 2019 in particular, you start to get everyone aware of the September effect, and it becomes, as I said, self-fulfilling. The September effect for the year 2020 actually began on August 4th. That was the low after the March Panic. So, you had the March Panic where rates kind of got low and then really backed up and then went lower again. Again, that rally in the middle part of the year hit its low on August 4th at 52 basis points. So, there was a

September effect, but it wasn't very big, and that seemed consistent with the time too. Whatever's going on in September, you had the economy that was struggling to come out of the pandemic and really the lockdowns, so a small move seemed relatively consistent with everything that was going on. The next time, September of 2021, once again, you've got rates moving lower through the middle part of the year, June and July, hitting a low of 1.19% on August 3rd and 4th. You see these repeating patterns all throughout the marketplace, and by the end of September, September 29th, the 10-year had moved up to 1.55%, and we get to 1.68% by October of October 21st. So, that was a 49 basis point move from August 3rd and 4th all the way to October 21st, so consistent with the prior ones. But then we get to September 2022. Now we've got the FED hiking rates, we've got higher for longer, we've got aggressive rate hikes, we've got

inflation fears and everything else, and the September effect was much, much larger, largely because the Fed was pushing up the short end of the yield curve. After a big move higher, a sell-off in bonds earlier in the year, rates had come down pretty aggressively, pretty sharply late in the second half of June into July, getting to the lowest point on August 1st of 2022 at 2.6%. They would move up to above 3% by August 24th, so a quick move there, and then got to almost 4% by the end of September, reaching a high of 4.24% on October 20th. But from October 20th, people were caught off guard by another large rally from there. So from the start of the September effect to the end, August 1st to October 20th, it was about 164 basis points in the 10-year treasury. And again, a lot of that was the front end of the yield curve in the Federal Reserve. Then last year, the September

effect last year actually began in July. The 10-year treasury had moved higher. It wasn't really rallying in the middle part of the year because it had rallied earlier with the banking crisis in March, in April, in the first part of May. But it got to a low on July 19th, about 3.75%. And by the end on October 19th of 2023, the tenure had moved all the way up to just under 5%. And everybody was convinced it was going to go to 6, 7, 8, 9, 10. So while we don't know exactly where this started, and we have a vague idea of why it continues, what it all means is that interest rates go up in September, August, September, and October, regardless of the economic or monetary or financial fundamentals, and that we should not read too much into rates rising, just like we shouldn't have read too much into rates rising earlier this year. This is consistent with the pattern. It's not the

market changing its mind. It's the fact that nothing ever goes in a straight line, and at least with the September effect, we have an established pattern that tells us we should not expect a straight line and when to not expect the straight line. So, consistent with the historical pattern, big rally last year after the September effect of 2023 ended. Then, you had the multi-on pause through the end of April, the next leg of the rally making a big move, right? Also consistent with the pattern June-July, the middle part of the year, and into the early month, early part of the month of August. Now that all of that's happened, and now we're past the middle of August, we should expect rates to go up, not because the market is repricing risk or repricing recession or repricing any type of global factors. It's going out because it's September again. So, we don't want to read too much into the rise, though we can get a sense of the underlying fundamentals like in September 2019 by how much rates might

rise during this September effect. Will they be short-circuited by the other September phenomenon, which is the bottleneck? That's the one that tripped up Lehman Brothers and AIG and everybody in 2008. It showed up again in September of 2019. It seemed to have short-circuited the September effect in 2019. So, while that's one that we can't really say for sure how much of an effect that's going to have, if any, that is something we also need to keep in mind. So, we've got the historical pattern, the larger historical pattern in bond, in the bond rally, the bond market rates are going lower, fundamental reasons, but not in a straight line because of September. And if the September bottleneck shows up, they might actually go out of the pattern and go sharply lower because if the September bottleneck happens, that means nothing good at all. They say beware the Ides of March, but we need to be very wary about September.

for a couple of different reasons. Despite the fact that nothing fundamental has changed here, I expect interest rates to go up because of September. They're also keeping a very wary eye on the other September for very different reasons because of course the September effect and the September bottleneck are globally synchronized. It's a globally synchronized system after all, and I examined that through the lens of interest rates in the video link below. As always, thank you very much for joining me. Huge thank you EUR dollar University members and subscribers, and until next time, take care.

I've Changed My Mind, I Think Interest Rates are About to Rise, Here's Why

Monetary science reborn. Rediscovering the principles of currency. Putting central banks where they belong. Welcome to Eurodollar University, your place for all things modern money and monetary science. The YouTube channel for Jeff Snider, from here you can begin to investigate all the ways in which the global monetary system impacts you: economy, politics, investments and more.