Welcome to the Weekly Fix, the newsletter that knows not all German '80s pop was an acquired taste –Emily Barrett, FX/Rates reporter. A is for Apple, K is for KryptoniteLooks like we've settled on the letter -- K -- that best describes this recovery (hat-tip Peter Atwater of Financial Insyghts, who shares the credit), and while it earns higher Scrabble points than the others, it's also the most insidious of the lot. The idea behind the letter is that some people and companies have managed to get through the health crisis in relatively good shape, while many others are suffering. K-shaped economic and market data abound, and show a widening gap between the comparatively privileged -- for instance, those with jobs they can readily do from home -- and the disenfranchised. This divergence is wretched in part because it raises the risk that those in charge of the rescue effort will call it off when headline numbers are looking better. For instance, the urgency of another $1-trillion-plus stimulus package was apparently harder to grasp with payrolls numbers beating expectations -- at least, that's one way to read lawmakers' failure to seal a deal before the August recess. The Covid-19-exacerbated gap between the privileged and the rest is a depressingly pervasive pattern, and it's reflected in the bond market (isn't everything?). This week, high-grade issuance reached $1.346 trillion for the year-to-date, smashing the full-year record set in 2017. Over the past three months, A-listers Amazon, Alphabet and now Apple have each secured the lowest borrowing costs in history, or got close to them, for monster deals. Meanwhile, New York's MTA just turned to the Fed for affordable funding. Unequal access to the corporate bond market puts the U.S. recovery at risk, as Sally Bakewell and team described recently. Disparities have always existed in the bond market, but more banks have tightened standards on lending to small businesses than at any time since 2009, and the stakes are higher than ever now, amid warnings of record corporate defaults and bankruptcies. Those tallies will most likely understate the extent of the damage. As our Madeleine Ngo reports, a wave of small business failures may be going unrecorded. That bodes poorly for vast swathes of the country, as businesses with fewer than 500 staff account for roughly 44% of U.S. economic activity, and employ almost half of the private workforce.  That looks particularly ominous as weekly initial jobless claims rise back above 1 million -- one of possibly more worrying reports to come as the beneficial effects of the last big government spending package wear off. The painful and long-term implications of a K-shaped recovery are kryptonite to the Fed, which has faced widespread accusations of exacerbating inequality in its response to the global financial crisis. Until this crisis, policy makers could say that lower-for-longer interest rates had contributed to historically low unemployment rates for Black and Hispanic Americans. Now, these groups are facing the fastest rates of job losses. With interest rates already very low, leaning more heavily on its bond purchase programs leaves the Fed defending itself against renewed accusations of simply pumping up asset prices and courting moral hazard. This week, New York Fed researchers Ken Garbade and Frank Keane posted a defense of the Fed's actions to the Liberty Street Economics blog. They argued that "the infrequency of Federal Reserve intervention suggests that relying on the Fed on those rare occasions when markets are in extremis has not materially exacerbated moral hazard." Less B/S=BadThis seems a good time to check in on the Fed's balance sheet, since one person's moral hazard is another's, well, morale. Also, it came up in the most recent central bank minutes, which gave markets a bit of a fright. Market watchers don't tend to get too excited by the minutes these days -- by the time they're out, weeks after the meeting, events tend to have moved on. But this release nudged Treasury yields higher on what was already a rough day, following a weak auction of long-dated government bonds. The move seems to have been prompted by the lack of a more strongly dovish message -- for instance the perception that officials again sounded unenthusiastic about capping Treasury yields. Since they haven't entirely dismissed the idea -- which would involve setting caps at specific points on the curve -- and never clearly embraced it, the reaction seemed a bit touchy. But the fright might have come from the objections raised, which included "the possibility of an excessively rapid expansion of the balance sheet." It's worth noting here that markets may have a somewhat unhealthily codependent relationship with the Fed's balance sheet. In May 2013, the hint of slowing asset purchases after the global financial crisis caused what became known as the "taper tantrum." There was another ruckus in 2018 when the Fed delivered what was to be its last rate hike in the midst of a portfolio unwind. Which brings us to now. The Fed's balance-sheet growth has stalled out around $7 trillion -- compared with a peak of $4.5 trillion in 2014 -- and even shrunk over the past couple of months. The latest figures show a bump thanks to Treasury and mortgage-backed securities purchases. The broader slide comes from lower usage of dollar swap lines by foreign central banks, and repurchase operations that lend short-term funds in exchange for government securities. Its holdings under the other emergency facilities, including the primary credit facilities, have also dwindled.  This isn't the free-for-all that investors envisaged a few months ago when all hell was breaking loose. The Fed's rescue mission starting in March pumped so much cash into the system, so fast, that the balance sheet was seen ballooning to as much as $10 trillion. The market wobble this week may be a recalibration, as investors reassess their assumptions of Fed support. Barclays this week shifted its steeper recommendation on the 10s30s swap curve to neutral -- their note stood out with the title "Cheer Up" -- citing "rising uncertainty about the Fed's reaction function." That long-end steepening hit a wall this week, as did the five- to 30-year part of the curve.  That trade hasn't lost its luster for Pimco money manager Mark Kiesel, however. He sees a combination of a gradually strengthening recovery and inflationary pressure -- enabled by a more-lenient Fed stance -- lifting long-end yields, along with the expectation of continued heavy government borrowing. "You have to expect more of a term premium built into the curve," he said. There's not long to wait for more thoughts from the Fed. Next week policy makers will convene awkwardly for their virtual Jackson Hole event, which tends to have a big-picture flavor -- it's unclear how that might suffer without the breathtaking views. The speeches should provide at least some steer on the Fed's long-running review of its policy framework, which is widely expected to entail a more tolerant stance on inflation. One thing the minutes seemed to make pretty clear was that these new parameters need to be communicated properly to the market before more pledges of support can be made. Read into that what you will. 30-Year SwitchThe U.S. government's recent sales of long bonds -- the 30- and 20-year maturities, including a rough TIPS auction -- didn't go so well. Whereas in Germany, demand for its offer of 1.25 billion euros ($1.5 billion) of 30-year debt soared like a Luftballon this week. The European auction apparently drew the largest oversubscription for a 30-year German government bond in Bloomberg data going back to 1997. Its success helped pushed yields in the secondary market further below zero, after a brief foray to as high as 0.05% last week.  The reception seems a little counterintuitive, as investors were flocking to an average yield 5 basis points below zero. The U.S. 30-year was awarded at 1.41%. But this is a false comparison. What it comes down to is just how much more those bonds can appreciate, and with the Fed sounding aloof about more bond purchases, there's plenty of room for Europe's bond markets to capitalize on more-dovish tones that side of the Atlantic. Not only is the European Central Bank expressing uncertainty about the recovery and another wave of Covid-19 infections, but the recent strength in the single currency versus the dollar may be starting to weigh on the market's inflation expectations. And that could push Governor Christine Lagarde to greater lengths at the Sept. 10 meeting. Bonus PointsHedgies dumped $LQD last quarter, but Soros didn't Geoeconomics and the balance of payments, a must-watch for nerds Susan B. Anthony wants no pardon; turning the lens on Black Suffragists Libor on the out: South Korea and Singapore have launched their first bonds linked to replacements for the scandal-ridden benchmark German towns prepare to bid farewell to American soldiers What next, 2020? Boils, locusts.. ah, chocolate snow, touché | 
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