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How stressed is the bond market? Very stressed–and I’m not talking Treasuries
The biggest bond market stress isn’t Treasuries–although the downward move in Treasury prices and the upward move in yields is deservingly getting a lot of attention. Afterall, it’s not every year that the yield on the 10-year Treasury, at 5.28% on October 6, climbs 101 basis points–that’s a tad over a full percentage point–in 12 months.
No, the big stress is in the corporate bond market where we’re seeing an accelerating collapse in prices in the lowest-rated, non-investment grade corporate debt as investors ask for higher risk premiums.
Bonds say “Worry” but stocks look at projected earnings and say “What, me worry?”
Bond yields keep rising. Premiums for holding risky bonds keep climbing. Bonds below investment grade are trading at deeply distessed prices. The bond market is clearly signalling tough, risky, potentially loss-filled times ahead. And stocks just don’t care The Nasdaq 100 Index hit a fresh record on Friday and is up 22% this year, while the S&P 500 Index is less than 1% from the all-time high it reached in August. Why? Extraodinary projected earnings growth from Big Tech in the quarters ahead.
Another side to the AI boom–U.S. trade deficit soars in August on chip imports
The U.S. trade deficit rose sharply in August to hit a 17-month high, after also rising significantly in July, data from the Commerce Department showed Tuesday. The trade deficit grew to $105.6 billion in August, a 13.7% increase from July, driven by an increase in imports of petroleum, gold and chips used for artificial intelligence.
The September jobs report poses a huge challenge for the Fed
What a difference an employment report makes. Before the September jobs report, released on Friday, October 2, the CME FedWatch Tool, which looks at the Fed Funds Futures market for its read on traders’ sentiment, was giving 70.9% odds of a 25 basis point interest rate increase at the Fed’s October 28 meeting. Today, Monday, October 5, after the report, the odds of an interest rate increase at the October meeting have droppedd to just 19.4%. What happened?
I’d down with a bad cold
My apologies. I slept for 18 hours yesterday in hope of fighting if off. I hope to be bck to my regular posting schedule tomorrow.
The Treasury selling continues–and could stretch into October, the worst month for bonds
Yields on the U.S. Treasury’s longest-dated bond rose for a sixth straight day, crossing another key threshold amid a deepening selloff across global debt markets. The yield on the 30-year Treasury closed at 5.57% after touching 5.61% on Tuesday, a level last seen in 2002. The yield on the 10-year closed at 5.24%. The 5-year closed at 5.05%. The increase in the 30-year yield is the latest in a series of milestones for the $32 trillion Treasuries market. In the U.S., surging business activity and worry about government debt levels have provided momentum for what’s become the biggest Treasury selloff since Trump’s April 2025 tariff rollout sent markets into a tailspin. A full calendar of competing fund-raising from corporate debt offerings hasn’t helped. And October is historically a terrible month in the bond markets.
Hidden tide of long-term unemployment is rising
It’s one consequence of the low fire/low hire labor market. The average time it takes to find a job recently surpassed six months, the longest stretch since the mid-2010s outside of the pandemic era, and the resulting rise in long-term unemployment is unprecedented outside of recessions.
Consumer confidence plunges in September
U.S. consumer confidence fell in September to the lowest level since 2014 as views about the economy and the labor market deteriorated. The Conference Board’s gauge of confidence decreased 6.7 points to 81.9 after a downward revision to the prior month, data released Tuesday showed. The figure was well below all expectations in a Bloomberg survey of economists. An indicator of present conditions dropped nearly 8 points to the lowest since 2021, and a measure of expectations for the next six months declined to a more than one-year low. What concerns me most about this report isn’t the downward diection but the size of the drop. Consumers and consumer spending have hung intelativelt well despite a series of negative events from the Iran war and soaring energy prices, to recently faltering real wages to persisent inflation. If consumers have finally started to get pessimistic, it could spell real trouble for the economy.
Bonds sell off on promise of more war with Iran
The selloff in the US bond market deepened on Monday after President Donald Trump rejected Iran’s latest proposal to reopen the Strait of Hormuz, and Iran vowed that it wouldn’t soften its conditions to reopen the Strait of Hormuz. Iranian officials have expressed pessimism about reaching a deal to end hostilities with Washington and reopen the Strait of Hormuz before U.S. midterm elections in November. President Trump has expressed a belief that Iran won’t strike an agreement until after those elections. The decline pushed Treasury yields higher with those on 10-year bonds closing at 5.23%, up 7 basis points on the day.
A key Fed inflation argument is crumbling–and economic data later this week could take odds of an October interest rate increase higher
The inflation debate at the Federal Reserve has been whether supply side shocks such as the closing of the Strait Hormuz to oil and petrochemical tankers should be treated as one-off events. And whether the Federal Reserve should look through these supply side shocks and sopehowendeavor to discover the real underlying inflation rate in the economy. Until recently the look through-it, the supply-side-shocks-are-transitory argument had enough support within the Fed to keep the central bank on the sidelines. That argument is finding less and less support at the Fed in the last few months. Most obviously, of course, in the Fed’s decision to raise interest rates by 25 basis points on September 16. But less obviously in remarks and speeches by Fed officials now that the quiet period preceding the September meeting has passed.
Wait–there’s much more AI debt to worry about–there’s $1.65 trillion off the books
A number of readers pointed out that my piece on the soaring debt at Oracle from its spending on the AI infrastrucure build out was much too optimistic.
Besides the danger of on-the-books debt at Oracle (ORCL) getting down graded to junk bond status, there’s all the off-balance sheet debt that the big six AI hyperscalers–Alphabet, Amazon, Microsoft, Meta, Oracle and SpaceX–have essentially hidden in Special Purpose Vehicles (SPVs), structures that don’t show up on these companies’ books.
In July Nikkei Asia reported that five U.S. tech giants have an estimated $1.65 trillion in off-balance-sheet hidden debt.
Treasury Secretary Bessent tries to jawbone the Fed
Intervening in the Treasury market worked so well last time, why not try it again? On August 19, Treasury Secretary Scott Bessent announced an enlarged long-dated Treasury buyback program. The policy was to at least double the maximum repurchase size—from $2 billion to at least $4 billion per operation—for 10–30-year Treasuries. The program was expanded to $6 billion on September 10. After initially slightly depressing yields, the buybacks failed to stop yields from moving higher. The program was just too small–$6 billion in a $30 trillion Treasury market–and bond investors were skeptical about the Trump administration’s seriousness about reducing debt, inflation, or interest rates. On Friday, September 25, the yield on the 10-year Treasury was at 5.16%, up 49 basis points in the last month. This time around Bessent’s target audience is the Federal Reserve, rather than the bond investors. On Sunday, September 27, Bessent said on on Fox News’ Sunday Morning Futures that Federal Reserve policymakers should keep an “open mind” on interest rates, arguing that productivity gains from artificial intelligence and deregulation will help keep US inflation in check.
Saturday Night Quarterback says, For the week ahead check if …
President Donald Trump’s rejection on Saturday of Iran’s latest cease-fire proposal that offered to reopen the Strait of Hormuz and restart talks on the country’s nuclear program in exchange for U.S. concessions is likely not only to push oil prices higher but to result in lower Treasury bond prices and higher yields.
“They made a proposal, but I rejected it,” President Trump told reporters as he left the White House on Saturday morning.
Trump didn’t answer the question when asked if he expected to restart military strikes after the November midterm elections, saying Iran wanted “to make a deal where they open the strait immediately because they’re losing so badly.”
The hope for lower oil prices was a major factor this week keeping a lid on Treasury yields.
It’s not just Treasuries–how about the rout from AI debt at Oracle?
On Thursday Oracle’s (ORCL) credit default swaps spiked to record highs. Investors are worried at the size of Oracle’s debt load. And wonder if profits will arrive early enough to meet the debt burden. Oracle isn’t an isolated worry–it’s just the poster child for debt pressure facing AI companies. A big question, one of several, giving investors a reason not to buy stocks in the AI sector despite more reasonable valuations is whether profits from AI revenue growth will materialize before these companies have to pay the rising costs of borrowing to build out AI infrastructure.On Thursday, the cost OF Oracle’s debt reached unprecedented levels. At the same time the company’s borrowing costs surged, with the yield on its 6.7% bonds maturing in 2056 crossing 8% for the first time, according to Zerohedge.
Adding to my long-dated Treasury short TBF
The ProShares Short 20+ Year Treasury ETF (TBF) is up 10.22% for 2026 as of the close on September 23. The ETF, which gains as long-dated Treasury bonds fall in price, is likely be a profitable hedge–and indeed just plain profitable–into 2027 as we get more interest rate increases from the Federal Reserve at its December meeting and into 2027.
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