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Magic Markets #288: Treasury Troubles and Walmart Wobbles

Mohammed Nalla unpacks the US Treasury’s decision to increase buybacks at the long end of the bond market, explaining why soaring long-term yields matter for everything from mortgages and property valuations to equity markets. He also explores why this intervention may ease pressure temporarily, without addressing the deeper issues of inflation, deficits and government borrowing.

The discussion then shifts to Walmart, where The Finance Ghost digs into a fascinating set of results that managed to disappoint the market despite strong underlying fundamentals. From margin expansion and eCommerce growth to tariff refunds and valuation concerns, the hosts explore whether the share price reaction was justified and what Walmart’s outlook says about the health of the US consumer.

In this episode:

  • Why the US Treasury is intervening in the long end of the bond market
  • The difference between Treasury buybacks, QE and Operation Twist
  • Why elevated long-term yields remain a major risk for markets
  • How Walmart delivered strong profit growth despite missing sales expectations
  • The role of tariff refunds in Walmart’s latest results
  • Why eCommerce, advertising and logistics are becoming increasingly important growth drivers for Walmart
  • What Walmart’s outlook reveals about the resilience of the American consumer toda

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Disclaimer: This podcast is for informational purposes only and does not constitute financial or investment advice. Please speak to your personal financial advisor. 

Transcript:

The Finance Ghost: Welcome to episode 288 of Magic Markets. I’m your co-host, The Finance Ghost. Here, as always, with Mohammed Nalla. Trying a few new things this week. It’s going to be nice and punchy.

We’ve each got certain things that we’ve brought to the show. Moe will be unpacking why the US Treasury has stepped into the long end of the bond market, what it can and cannot achieve, and why elevated yields still matter for everything from mortgages to equity valuations.

I’ll be dealing with Walmart and all the things we can learn from their latest results – which were, I must say, very interesting.

Moe, over to you with your macro overview. I’m excited to learn from you this week.

 

Mohammed Nalla: Absolutely, Ghost. Let’s jump straight in. The biggest story last week in the markets was certainly the US Treasury stepping into the bond market, and it’s really looking at intervening at the long end of the yield curve.

I’m going to unpack that, starting off with the fact that before this announcement, the 30-year US Treasury yield briefly moved around 5.4%, and that is its highest level since 2007.

This is important because that 30-year benchmark is really the one that feeds into mortgage rates, corporate borrowing costs, property valuations, and effectively your long-end discount rate for long-duration equities. So, when the long end moves sharply higher, it’s effectively tightening financial conditions, even if the Fed itself is doing nothing.

Now, there’s also a global element here. It’s not just a US move. We’ve seen Japanese, German, French yields – they’re all hitting multi-year (or, in some cases, multi-decade) highs. So, investors in the market are clearly demanding more compensation to hold long-dated sovereign debt.

The drivers are all familiar. We’ve got oil above $90 at the moment, inflation risks, very heavy government borrowing and large deficits. Then you’ve also got corporate issuance linked to AI and this data-centre theme we’ve spoken a lot about. That’s also coming through at the longer end of the yield curve in a time when you have fairly thin liquidity in the North American summer. So, this was really the perfect setup for those bond yields to be pushing substantially higher.

Long story short, that long end was becoming too uncomfortable. The Fed hasn’t been doing much, and so the US Treasury decided they’re going to step in here. They announced around midweek last week that they’re going to be targeting an increase in the long-end buybacks.

They do currently do that, but they’ve moved the maximum size of certain operations from $2 billion to $4 billion per operation. This targets the bonds that sit in the 10- to 20-year bucket as well as the 20- to 30-year bucket.

The market’s reaction initially was that it liked it. The 10-year yield fell around 6 basis points, the 30-year falling a little bit more, by around 10 basis points. That’s a yield curve flattening – it’s called a bull flattener – that came through because the long end outperformed.

But that rally ended very quickly, and by the end of the week you actually saw most of those gains given back. Not all of them, but most. That tells you the market says, “Yes, maybe this is helpful, but it’s not enough to actually change the overall direction.”

To unpack how the Treasury is going to go about doing this: they’re mostly buying those older, less liquid bonds – the off-the-run Treasuries, the ones that are maybe not as liquid. They’re looking at addressing that liquidity problem where the spreads are a little bit wider. They effectively say, “We’re in the market here, and if you are someone holding this, show us your best offer, and if we like it, we’re going to take that.”

This is why I would say it’s sort of QE-esque, but it’s not really QE. One of the main differences between Quantitative Easing (something which was run by the Fed) and what’s happening here, is that the Fed effectively creates reserves by buying assets on a much larger scale. The Fed runs in the hundreds of billions, if not trillions, of dollars.

This is not the Fed. This is the US Treasury. That’s very important to note, because this is a debt management tool, and the scale is obviously a lot smaller – as I mentioned, tens of billions, not hundreds of billions. That’s one of the key differences.

The other thing: is it similar to the Operation Twist that we saw the Fed perform a while ago, where they tried to flatten the yield curve out? I would say yes, it’s somewhat similar in that longer-end liabilities supply will be reduced; shorter liabilities might rise. But this is much smaller and, as I mentioned, Treasury-funded.

What does this mean for investors? It means that the 20- and 30-year part of the curve could get some tactical support. Is it a bit of a soft put by the US Treasury? Yes, the curve can flatten for a while if that long end outperforms. But you may also see that the sell-offs we’ve been experiencing in the long end of the curve may become a little bit more stop-start. That’s because the market now knows the Treasury is certainly willing and able to intervene in that market.

It’s important to note (over the longer term, because now I want to zoom all the way back out as I wrap this up) that this doesn’t solve the long-term problem that has actually pushed the yield curve – and yields in general – to the levels we’re seeing right now.

It’s a short-term fix. It might flatten the yield curve, but it doesn’t solve inflation. It doesn’t solve the deficit. It doesn’t solve the government’s total borrowing requirement and the large deficits you’re seeing there.

The investors would probably look through that. That’s what you saw coming through in the market last week, with the fact that the rally was short-lived. So, it might slow the rise in long-term yields, but it doesn’t fix the overall problem.

Why is all of this important, at the end of the day? The long-end yields are one of the biggest swing factors in the market. If the long end stays elevated, it’s going to pressure housing – we’ve seen some of that come through. That pressures REITs. It’s going to pressure corporate debt – I mentioned a lot of issuance coming through.

It also pressures other vulnerable sectors of the market, like the private equity sector. Just watch that, because if these rates stay as high as they are, that’s going to come through as a little bit of pressure.

Wrapping it up, the Treasury has put a speed bump in front of the long end of the yield curve. We might see that pause things in the shorter term. It helps the plumbing, but doesn’t solve the underlying problems.

What really matters is whether consumers can stay resilient enough to ride out what has effectively been a higher cost-of-money world versus the zero-interest rate era we had a little while back. I think that’s a nice way to segue across to you, looking at Walmart, because that’s going to give us a nice lens in terms of how the consumer is actually faring in these market conditions.

 

The Finance Ghost: Thanks, Moe. Exactly. Let’s jump into Walmart now. They released results on 20th August, which marks the halfway point in their financial year. Share price, up around 6% over 12 months when I prepped for this. It got whacked by 9% on the day of release, so the market did not like it.

EBIT multiple, below 28x, which is only a little bit higher than the three-year mean of 26.7x. So, the share price has come under some pressure in the aftermath of these results. Interestingly, it’s despite the fact that there are actually a lot of really impressive underlying fundamentals going on here.

The share price has managed a CAGR (compound annual growth rate), I must point out, of almost 19% over five years, so it has been a very good performer with a longer-term lens. Plus, you get a small divvy of around 1% yield. So, something has spooked the market in the latest numbers. But before that, Walmart had come into this on quite a streak.

So, what didn’t the market like? It seems to be the US sales growth that really set the hares running here. On a comparable basis, excluding fuel, that metric grew 2.6% in the US. That is well below analyst expectations that were more like 3.5%.

Walmart has blamed healthcare sales here, impacted by regulatory pricing action. And when we do the deep dives in Magic Markets Premium, we always look at companies that have regulated pricing and highlight this as a risk. If they can’t always set their own prices, they can’t always protect their own margins.

On the plus side, and another regulatory issue, they’ve just achieved operating income growth in the US of around 10%, excluding tariff refunds. If you actually add in the tariff refunds, then you’ll get 17.9%. So, the tariffs themselves are responsible for over 750 basis points. It’s quite a number.

They describe this as the best leverage they’ve seen in the US comparable numbers in two decades, and that’s if you exclude the tariff refunds. So, really good job there.

However, I’m not sure you can actually make that claim, because part of the reason for that comparable sales growth, that 2.6% excluding fuel, is that they’ve gone and reinvested the tariff refunds in the price. So, I don’t think it’s fair to say, “Well, we grew our sales 2.6%. We grew our operating income 10%, ignoring tariffs.” Because in reality, the tariffs actually helped them drive the sales growth.

It’s a bit messy, but there is some good leverage underneath all of this and well done to them. They had 11,000 rollbacks during the quarter – that’s 11,000 items where the price was decreased. It’s quite amazing.

Bigger picture here: gross margin has been 24% to 25% year after year. Operating margin, between 4% and 4.5%. Net income margin, between 2% and 3%. So, really consistent performer over the years. That’s an important thing to keep in mind when you look at these latest numbers, consider the skew from the tariffs and what this might be doing to the US-based numbers.

It’s also amazing to think, by the way, that for every dollar that goes through a till at Walmart, only 2 to 3 US cents actually lands in the hands of shareholders as a profit. It’s amazing how small these margins actually are. And only 35% of that number will then hit them as a dividend. The rest is reinvested for growth or used for share repurchases.

And there’s plenty of capex here that they need that money for, so that’s why the payout ratio is relatively low. Over the past 12 months, Walmart has put $29.4 billion into capex versus $7.7 billion into dividends and nearly $7 billion into share repurchases. So, pretty capex-heavy model here. Growing out that footprint is no joke.

But, shareholders are not really complaining because return on equity (ROE) at Walmart is up at 22.3% from mid-teens during the pandemic, and it’s also up versus pre-pandemic levels. Yes, it is a structurally more leveraged balance sheet than before the pandemic, and obviously that is affecting ROE positively here, but there’s a modest uptick in return on assets as well.

Another very important point I need to cover in this podcast is eCommerce. That is a big growth engine at Walmart – up 23% year on year in the latest quarter. That is the tenth consecutive quarter of growth of over 20% for that business. Really, really impressive. That’s in the US, in particular.

They used that to drive things like memberships in Sam’s Club (which is their warehouse operation that competes with Costco), for example, and the related loyalty benefits. Plus, they pushed advertising revenue up 38%.

Another thing to just touch on quickly: third-party marketplace. That helps them drive activity on this platform without having to take inventory risk. Nearly 50% of marketplace business flowed through Walmart Fulfilment Services. That’s another source of revenue. That’s Walmart building out their distribution network and then offering it to third-party sellers.

And speed absolutely matters here, because fast delivery in the US was up 48% for the quarter. Never mind the 60-minute promise in South Africa, we’re talking sub-30-minute delivery in 38 markets in the US. That gives you an idea of how impressive this actually is.

Touching on a couple more points: international sales up 7.9%, led by China and India. I’d love to see South Africa on that list, but we can really only dream.

Now, to bring it all together. Operating income growth was actually right at the top end of their guidance of 7% to 10%. They actually feel so good about the numbers that have come through that they’ve just raised their guidance. They’ve gone for 4% to 5% sales growth for the year, up from 3.5% to 4.5% previously. Operating income growth they now say will be 7% to 8.5% versus 6% to 8% previously. And yet the share price came off really hard.

So, was that share price knock somewhat overcooked here? Was the market just getting scared about a comparable sales number without actually reading through all the leverage, all the benefits that Walmart is unlocking in its business, how impressive that eCommerce story is?

Or is this just a function of a really hot valuation? These are very high multiples, so any miss versus analyst estimates is going to be punished. Even if management says, “Hey, don’t worry about it, the full year is going to be great.”

So, very interesting dislocation here in Walmart, Moe, and I think something to just keep on the radar.

 

Mohammed Nalla: Indeed, Ghost. Walmart is a stock that I liked throughout most of last year. In fact, I had preferred that over Costco. And then, earlier this year, you actually saw the wheels coming off a little bit. You saw that stock underperforming the likes of Costco. Again, different issues behind what’s driving that move.

To wrap up the show, on my section: Treasury, trying to calm the cost-of-money problem. Walmart, giving us a real-world read on whether the consumer can actually keep absorbing it. Based on their outlook, they’re not as concerned as maybe other sectors of the market, in terms of consumer health going forward. Let’s watch that very closely.

We’ll leave it there for this week. Let us know what you thought of the show. Hit us up on social media. It’s @MagicMarketsPod, @FinanceGhost and @MohammedNalla, all on X, or you can find us on LinkedIn.

We also post this podcast on YouTube, so go and check that out as well. We hope you’ve enjoyed this.

Until next week, same time, same place. Thanks, and cheers.

The Finance Ghost: Ciao.