Insights

US Treasuries

• The 10-year Treasury yield is currently 4.71%, 2 basis points higher since last Monday morning. This past week, 10-year bonds traded in a 12-basis point range (4.63% - 4.75%).
• 2-year Treasuries are at 4.24% this morning, 7 basis points higher than last week.

Trading Recap

10-year bonds have traded generally weaker this past week, reflecting continued concern about crude oil prices and the Iran war, weakness in sovereign debt globally, and concern over the supply of Treasuries and corporate debt issuance competing for the same long-dated investors. While the US Treasury sought to settle the market on Wednesday by announcing it would “at least double” purchases of long-term government debt, the market isn’t convinced that it makes a difference. After an initial kneejerk improvement down to 4.63% with the Treasury buyback announcement, 10-year yields grinded higher throughout the rest of the week. On Friday, Treasury Secretary Scott Bessent indicated an announcement is forthcoming regarding the administration’s new fiscal initiative to address high yields.

Last Week’s Economic Data

Last week's data presented a mixed picture — housing activity deteriorated sharply, import/export price data came in softer than expected, and labor market readings remained resilient.

Housing Data – Mostly Weaker

• NAHB Housing Market Index (Aug): The NAHB index printed at 35 versus 34 in July and the consensus estimate of 33. While modestly better, readings this far below 50 signals broad housing weakness.
• Housing Starts (July): -12.4% MoM with 1.239 million versus 1.415 million in June, as revised, and the forecast at 1.345 million.
• Building Permits (July, Preliminary) printed higher +5% MoM, 1.443 million versus 1.374 million in June and the forecast at 1.375 million.
• Pending Home Sales MoM (July): Pending home sales dropped -2.3% in July versus -4.8% in June, as revised, and a forecast of no change.

Import and Export Prices

• Import Price Index MoM (July) - Lower, -0.4% versus June’s at -0.3%, as revised, and the forecast at +0.1%. For the year, import prices are up 5.9% versus 6.7% as of June, as revised. 
• Export Price Index MoM (July) - Export prices were down -1.3% for the month, versus -0.7% in June, as revised, and no-change forecast.       

Other Economic Data

• Industrial Production MoM (July): +0.2% versus +0.3% in June, as revised, and the forecast of +0.3%.           
• Manufacturing Production MoM (July) +0.2% versus +0.3% in June, as revised, and in line with the forecast of +0.2%.             
• Capacity Utilization (July): 76.3% versus 76.2% in June, as revised, and in line with the forecast.
• Weekly Initial Jobless Claims: Jobless claims printed at 206k, below the estimate at 210k and the prior week’s 212k, as revised. Consistent with a solid labor market.
• Conference Board Leading Index: The leading economic index turned positive at +0.2% in July, reversing the prior month's -0.1% decline, as revised, and beating the +0.1% consensus estimate.

Fed Monetary Policy

Fed Funds rate remains at 3.63% (target range 3.50%-3.75%). After the last FOMC meeting (July 28-29) and Warsh post-meeting news conference, the bond market began front-running a Fed rate hike based on the notion that the Fed will pursue a restrictive policy to contain inflation. However, the soft CPI and PPI data from two weeks ago reduced the likelihood of a Fed rate hike at the FOMC meeting on September 16th. The Fed will see the August CPI and PPI inflation data before the September FOMC meeting.

This Friday morning, Fed Chairman Warsh will speak at the Kansas City Fed's annual Jackson Hole Economic Policy Symposium. The bond market expects Warsh to use the speech to frame the macroeconomic issues facing the Fed, including the Fed’s inflation target, productivity, demographic changes, and global economic shocks. Bond investors will be listening for signals about a rate hike at the September 16th FOMC meeting and Warsh’s view on the long-end of the bond market. The market could well be disappointed; Warsh prides himself on not providing forward guidance about what the Fed intends to do.

The yield curve implies a 10-basis point increase in the Fed Funds rate at the September 16th FOMC meeting, equivalent to a 40% probability of a 25-basis-point rate hike. The futures curve implies approximately 26 basis points of additional tightening by year-end 2026, equivalent to one full 25-basis-point hike. Looking further out, the futures market prices-in another 18 basis points of tightening through 2027.

My Take on Longer Term Yields

The 10-year Treasury yield will likely remain in a 4.60% to 4.75% range in the near term. At 4.71%, the 10-year yield is within ~30 basis points of the upper-end of the range over the last 20 years (since pre-financial crisis started in late 2007). The 10-year yield approached 5.0% in October 2023 and again reached roughly 4.80% in January 2025, just before President Trump's inauguration. Meanwhile, the 30-year Treasury bond yield is currently around 5.24%, its highest level since 2007.

Inflation expectations do not appear to be the primary driver for the higher rates. While headline inflation remains in the mid-3% range (July CPI 3.4%), 10-year TIPS breakeven inflation expectations are approximately 2.3%, suggesting that much of the backup in yields has been driven by higher term premium rather than a significant repricing of long-term inflation expectations.

Beyond inflation, factors that are providing additional upward pressure on interest rates include:

• Greater policy uncertainty stemming from limited forward guidance from the Federal Reserve.
• The ongoing Iran war and disruption in crude oil shipments through the Strait of Hormuz, putting additional pressure on inflation, particularly if crude oil prices continue moving toward $100 per barrel.
• Higher sovereign yields globally, increasing the competition for capital and reducing the relative attractiveness of US Treasuries.
• Japan pushing yen-based yields higher and likely selling US treasuries in an effort to defend their currency. A couple weeks ago, the US Treasury was prompted to help defend the yen by buying yen and selling European currencies.
• US corporate debt issuance is heavy as the AI data center buildouts continue, providing more competition for Treasuries.
• Fiscal deficits continue to march higher un-abated. The deficit is about 6% of GDP –way  above Treasury Secretary Bessent’s stated goal of reducing the deficit to 3% of GDP. US debt is now over $40 trillion and federal interest expense continues to rise.

This Week’s Economic Data

In addition to Fed Chairman Warsh’s comments on Friday in Jackson Hole, the bond market's focus will be on Wednesday's PCE inflation report and second estimate of Q2 GDP, followed by the preliminary benchmark payroll yearly revision and University of Michigan Consumer Sentiment and Inflation Expectations on Friday.

PCE Index, the Fed's preferred inflation gauge, is expected to print +0.1% on a headline and +0.2% on a core basis for July, with year-over-year readings forecasted at 3.6% and 3.3%, respectively. The second estimate of Q2 GDP will also be released Wednesday; the advance estimate had printed at 1.5% growth.

Friday's benchmark payroll revision could be the week's sleeper event, as it will provide an updated estimate of payroll employment for the 12 months through March 2026. The July jobs report already revealed a 23,000 decline in payrolls, while May and June were revised lower by a combined 103,000, suggesting the labor market was weaker than previously believed.

The information provided in this article, including, without limitation, any opinions, predictions, forecasts, commentaries or suggestions, is for informational purposes only and should not be construed to be professional or personal investment, financial, legal, tax or other advice.