Yields Don't Lie

This week, we discuss the elections, the latest GDP, PCE, and employment reports, and the sharp rise in equity market volatility. In what appeared to be a referendum on the rapid expansion of artificial intelligence infrastructure, the war in Iran, tariffs, and the Trump administration, Democrats captured both chambers of Congress and the governorship of Texas, one of the largest centers of AI investment in the country. At first glance, the latest GDP and employment reports offered reasons for optimism, with headline figures exceeding expectations. Yet, as has so often been the case, a closer examination revealed a less encouraging picture. Beneath the surface, the data pointed to continued weakness and largely reinforced longer term trends. The PCE report offered further evidence of a slowing consumer, as real disposable personal income declined from the previous month and real personal consumption expenditures were flat. More troubling still, the Federal Reserve's preferred measures of inflation are now firmly above 3% and continuing to rise, raising concerns that monetary policy may be falling behind the curve. These economic and political developments culminated in a sharp equity market selloff on Thursday. The S&P 500 and Nasdaq plunged 4.5% and 5.5%, respectively, while the Philadelphia Semiconductor Index suffered a staggering 12% decline. The rout erased approximately $2.5 trillion in market capitalization and pushed the Nasdaq into correction territory, underscoring growing investor unease as economic weakness, persistent inflation, and elevated valuations collide.

This week, we examine mounting weakness in the housing market, widening credit spreads, and renewed inflationary pressures. Pending home sales have fallen to their lowest level on record, surpassing even the depths of the Global Financial Crisis, as rising mortgage rates and growing economic uncertainty discourage prospective buyers. Housing starts, permits, and completions also remain subdued, underscoring the sector’s persistent weakness. Meanwhile, signs of distress are becoming increasingly apparent in credit markets. Spreads on the lowest rated corporate bonds, those rated CCC and below, continue to widen as lenders grow more cautious about deteriorating credit conditions. In September, the volume of loans trading below 60 cents on the dollar reached its highest level since March 2020, when the Covid pandemic first rattled financial markets. Finally, oil prices remain elevated following a surge in attacks on tankers in the Strait of Hormuz in October, with incidents reaching their highest level since the war began. The resulting increase in energy prices has pushed market expectations of inflation higher, with five year breakeven inflation rates reaching 2.5%, a level that has historically raised concerns at the Federal Reserve.

This week, we examine the latest labor market and inflation reports, the recent volatility in Treasury yields, and the implications for Federal Reserve policy. September's employment report revealed further signs of a deteriorating labor market. Nonfarm payrolls barely increased, with the entirety of the gains attributable to the health care and construction sectors. Downward revisions to July and August payrolls compounded the weakness, while annual growth in average hourly earnings fell to one of its lowest levels since the pandemic. Meanwhile, inflation offered little respite. Both the Consumer Price Index (CPI) and Producer Price Index (PPI) exceeded expectations, driven largely by rising gasoline prices. Particularly striking was the PPI report, which recorded its largest monthly increase since March 2022, while goods prices registered the sharpest monthly advance in the history of the series. Against this backdrop of weakening employment and resurgent inflation, yields on 10 year Treasury notes and 30 year Treasury bonds have risen sharply and become increasingly volatile.

In this episode, recorded on September 24, we discuss the worst day for Treasury yields in 18 months, the latest PMI composite, the escalating conflict with Iran, and Oracle’s dispute with lenders. Treasury note and bond yields suffered their sharpest one day rise in 18 months following a strong headline PMI reading, hawkish commentary from a Federal Reserve governor, and a weak Treasury note auction. Beneath the robust PMI headline, however, the details were less reassuring. Survey respondents reported mounting supply chain delays, while inflationary pressures climbed to their highest level since October 2022. The conflict with Iran also took a turn for the worse after President Trump threatened to “annihilate Iran,” while Iran outlined far fetched preconditions for returning to the negotiating table. Finally, in another unwelcome development for private credit, Oracle threatened to invoke a force majeure clause if construction of one of its Blue Owl backed data centers misses its 2028 completion target. The dispute highlights another potential vulnerability for private credit investors, particularly as economic growth weakens and the enormous capital requirements of the AI buildout increasingly collide with tighter financial conditions.

In this episode, recorded on September 18, we discuss the Census Bureau’s latest residential construction report, retail sales, rising Treasury yields, and developments in artificial intelligence. Housing completions fell 12 percent in August from the previous month and were 27 percent below their August 2025 level, leaving completions near levels last seen during the Global Financial Crisis. Retail sales exceeded expectations, but the headline strength was less impressive beneath the surface. Much of the increase can be attributed to higher prices and spending at gasoline stations and food services and drinking places. Meanwhile, yields on 10 year Treasury notes and 30 year Treasury bonds continued to climb as uncertainty surrounding the conflict in the Middle East intensified and concerns around the national balance sheet grew. Finally, leaders of several of the largest frontier AI labs called for a slower pace of AI development. Such restraint could weigh on AI related investment in the near term, potentially removing one of the principal supports for the recent equity market rally.

This week, we discuss the latest Employment Report, the Treasury’s $6 billion repurchase operation, the rise in Treasury yields, intervention in the Japanese yen, the war in Iran, and widening CCC credit spreads. While equity markets have remained remarkably stable, bond markets have borne much of the strain from recent macroeconomic and geopolitical developments. Many observers hailed the latest nonfarm payrolls report as evidence of a resilient labor market, but the underlying figures were considerably less reassuring. Wage growth slowed, labor force participation remained depressed, and the number of long term unemployed continued to rise. Meanwhile, Treasury Secretary Bessent’s $6 billion repurchase operation, three times the size of the most recent operations, did little to calm the bond market. The 30 year Treasury yield climbed to 5.3%, while the 10 year yield reached 4.84%. Mortgage rates followed, with the 30 year rate rising to 6.97%, adding further pressure to an already fragile housing market and, by extension, consumer spending. Geopolitical tensions provided another source of unease as Iran and the United States escalated their conflict, pushing oil above $100 a barrel and gasoline to $4.27 a gallon, its highest level in several months. Taken together, the week offered an increasingly stark contrast between the relative calm in equities and the mounting strains evident across bond and credit markets.

In this episode, we discuss the most recent PCE release and Fed Chair Kevin Warsh's speech at Jackson Hole. PCE came in higher than anticipated keeping the Federal Reserve on their toes. In addition, Warsh indicated in his Jackson Hole speech that the Fed needs to be more attentive to it's inflation mandate.

This week, we discuss the latest inflation data, the jobs report, Treasury Secretary Scott Bessent's bond buybacks, and the Federal Reserve minutes. July CPI came in below expectations, although much of the relief once again reflected energy prices. With that support likely to fade, we expect inflation to move higher in August. The labor market offered less cause for optimism. Headline payroll growth fell well short of expectations, reinforcing the weakness we have highlighted in recent months. More strikingly, the labor force participation rate continues to fall sharply as retiring Baby Boomers and discouraged workers leave the labor force. The Treasury, meanwhile, announced plans to buy back longer dated Treasury bonds in an effort to reduce long term interest rates, which have pushed up borrowing costs across the economy, from mortgages to data centers. We are skeptical that the program will have much effect. Bond yields initially fell following the announcement, only to rebound this week to near their recent highs. Finally, the Fed minutes revealed that a majority of FOMC members would favor raising rates if inflation remains elevated. They also exposed a widening divide between Chair Warsh and the rest of the Committee, raising questions about how much influence the new Chair can exert over the direction of monetary policy.

In this episode, we discuss Japan's latest efforts to stabilize the yen, the latest GDP report, and Chair Warsh's most recent press conference. After the yen fell to its weakest level against the dollar in four decades, Japanese policymakers began selling United States Treasuries, pushing the yield on the 30 year Treasury to its highest level since the Global Financial Crisis. The yen's decline reflected the wide interest rate differential between Japan and the United States, rising energy import costs, and growing concerns over Japan's substantial public debt burden. Although real GDP expanded at an annualized rate of 1.5 percent, much of the apparent strength in consumer spending came from prescription drugs, motor vehicle purchases, food services, financial services and insurance, and nonprofit activity, raising questions about the breadth and durability of household demand. Finally, Chair Warsh's press conference offered little in the way of new information, inviting the question of why it was held at all. While such events are typically cordial, this one became noticeably more confrontational as reporters pressed him on the growing gap between his forceful rhetoric on inflation and the absence of corresponding policy action.

This week, we examine housing, the labor market, rising interest rate expectations, and our broader investment thesis. The Census Bureau's latest report on new home sales modestly exceeded expectations, but sales remain historically subdued as the housing market continues to slow across much of the country. Initial unemployment claims unexpectedly declined, yet the headline figure masks several important developments, including weaker hiring, the retirement of baby boomers, and slower immigration, all of which have reduced labor force growth and complicated the interpretation of employment data. Meanwhile, the yield on the 10 year Treasury note climbed to 4.7 percent, its highest level of the year, as investors responded to concerns over an escalating conflict and the prospect of higher oil prices. The Federal Reserve remains in an increasingly difficult position, confronting a series of supply shocks that monetary policy is poorly equipped to address. Our view remains unchanged. Even if policy rates do not rise further, expectations that interest rates will remain elevated are likely to place additional pressure on households, weighing on consumer spending and broader economic activity.