There are no easy answers because the future is uncertain, and so the Fed runs the risk of making a non-trivial policy error at tomorrow’s FOMC meeting. The main dilemma: a variety of core inflation measures continue to show a disinflationary bias unfolding, while headline readings of prices highlight sticky inflation that’s still running well above the central bank’s 2% target.

In normal times, the Fed would likely focus on core metrics and decide that monetary policy was sufficiently tight. But for several reasons, one is hard-pressed to describe the current climate as normal.

Several factors are supporting headline inflation, including the ongoing Iran conflict, which is keeping energy costs elevated. The Trump administration’s revived tariff war is another source of upside pressure on prices. Growing concern about federal debt is another reason Wall Street remains concerned about inflation.

The good news, at least for now, is that headline inflation isn’t accelerating, although it’s not fading either. The consumer price index (CPI) was steady at a 3.4% year-over-year pace through August. Meanwhile, core CPI, which excludes volatile food and energy prices, ticked down to a 2.4% annual increase, the lowest in more than five years and close to the Fed’s 2% target.

On its face, the core measure of inflation is encouraging. What’s more, a variety of alternative core indexes confirm that a disinflationary bias is still in progress, as shown in the chart below.

Why, then, are Treasury yields rising? The benchmark 10-year rate crossed above 5% on Monday for the first time since Oct. 2023 before pulling back and closing at 4.99%. But in a sign that the bond market remains anxious about inflation and monetary policy, the 10-year yield in early trading on Tuesday rebounded to just above 5.04%, marking its highest point in nearly two decades.

Meanwhile, the policy-sensitive 2-year yield also pushed higher, jumping to 4.68% on Monday, the highest in more than two years and far above the Fed’s current 3.50%-3.75% target range. This maturity is pricing in high odds of a rate hike, which aligns with Fed funds futures, which are currently estimating a 90%-plus probability that the central bank will announce a hike tomorrow.

The challenge for the Fed is that it’s not obvious that the current policy rate, roughly 3.63% via the Effective Fed Funds rate, is dramatically inappropriate, based on a simple model that uses the unemployment rate and headline CPI as inputs. But the recent escalation in the Iran conflict, which is keeping energy prices elevated, is running interference in what might otherwise be a clearer picture for policy.

As the war escalates and reduces Middle East energy export capacity through developments such as the Houthis’ bombing of Saudi oil pipelines, the upside pressure on headline inflation may increase. The energy-related pressure would quickly fade if the war ended, but the conflict still looks set to persist in the near term. The US crude oil benchmark has shot higher recently and is trading above $100 a barrel for the first time since May.

Strong geopolitical drivers have tightened the normally modest correlation between oil and inflation. As a result, rising oil prices are actively driving up inflation expectations and putting upward pressure on interest rates, a relationship that could persist and perhaps strengthen as long as the war continues.

All of which puts the Fed in an especially tough spot. With market expectations confident that a rate hike is coming tomorrow, leaving the target rate unchanged could trigger a new phase of disappointment in the bond market and drive yields sharply higher. Alternatively, a hike could enrage President Trump, who has demanded lower rates, a scenario that could further imperil the Fed’s independence, depending on how the White House responds.

Perhaps the biggest risk is that the Fed embarks on a new tightening cycle that ends up being premature if the Iran conflict winds down and energy exports resume. But some analysts are worried that the Middle East crisis could last for many more months, in which case headline inflation could move significantly higher.

Deciding how to respond in real time without a clear understanding of how risks will evolve is a perennial challenge. The current situation is especially fraught on that front, leaving the Fed with an especially difficult choice tomorrow, a choice that can be summed up as: damned if it does, damned if it doesn’t.

The Capital Spectator estimates fair value for the 10-year yield using three models. The average of these models ticked up to 4.1% last month. The actual 10-year yield rose even more, increasing to an average of 4.68% in August, roughly 58 basis points above the average fair-value estimate.

The higher market premium extends a rise that began after the spread bottomed in October 2025 at roughly equilibrium, when the market yield and fair-value estimate were more or less aligned. Since then, the market premium has moved higher, fueled by several factors, including the Iran conflict, which has boosted headline inflation measures through higher energy costs.

The fair-value estimate has also been rising, but not as quickly as the market yield. One reason is that several of the inputs used to estimate fair value are economic indicators that arrive with a lag and are published monthly or quarterly. The bond market, by contrast, reprices Treasury yields in real time throughout each trading day and reacts quickly to current events.

If the recent trend continues, the market premium for the 10-year yield will soon exceed the previous peak set in early 2024. Recent market action suggests that a new peak could arrive as early as this month. Last week, the 10-year yield surged to just below 5.0%, the highest level since late 2023. A decisive move into the 5%-plus range would signal expectations for an even larger market premium in the months ahead.

The key variables are the Iran war and the political winds in Washington regarding the ballooning federal debt. Progress on either front appears unlikely in the near term. On that basis, both the market yield and the fair-value estimate are expected to move higher.

Additional factors supporting higher yields and fair-value estimates include a relatively robust US economy. Several nowcasts suggest that the upcoming third-quarter GDP report will show a solid pickup in growth. The Atlanta Fed’s GDPNow model, for example, currently estimates Q3 growth at 4.4%, marking a strong acceleration from Q2’s modest 1.5% advance.

Taken together, the evidence suggests that the bond market is pricing in a combination of fiscal strain, persistent inflation pressures, and resilient economic growth. Unless one or more of those forces begin to ease, Treasury investors are likely to continue demanding a sizable premium over fair value. For now, the path of least resistance appears to be higher for both yields and fair-value estimates, with the possibility that the 10-year rate will test levels not seen since before the pandemic-era bond rally reshaped the fixed-income landscape.

● The Awesome Portfolio: A simple, stress-free approach to investing
Jared Dillian
Summary via publisher (Harriman House)
For the last few decades, the conventional wisdom in investing has been to put your money in low-cost index funds, let them compound over time, and ride them into retirement, where you pick up your bag of money. Often, that isn’t what happens. Over the course of an investing lifetime, there will be enormous ups and downs, big bear markets, and people will be unable to withstand the volatility. If volatility is the enemy, then the goal should be to construct a portfolio that gives you something close to the returns of the stock market, but with a lot less volatility – enter Jared Dillian’s ‘Awesome Portfolio’. It is the portfolio for people who want to sleep at night, and not ever have to worry about what their investments are doing. In this practical and accessible book, Jared Dillian, a seasoned Wall Street veteran and financial thought leader, dives deep into the philosophy and rationale behind this approach, examining the historical returns and mathematics that make it work.

● The Forever Paycheck: The New Retirement Strategy to Spend More, Worry Less, and Never Run Out of Money
Jean Chatzky
Review via Publishers Weekly
Chatzky (Women with Money), the financial editor for NBC’s Today show, provides a detailed guide for living off one’s retirement savings. Some 66% of Americans fear running out of money in retirement, she notes, explaining many struggle after decades of saving to flip the switch to spending. Her solution is the “Forever Paycheck,” payments that last the rest of one’s lifetime. Getting paid on a routine schedule as opposed to a lump sum is key to minimizing worry and stress, she says, encouraging readers to convert some of the money in their retirement and other accounts into regular paychecks upon retiring.

● The Common Good Economy: How to Make Capitalism Work for Us All
Mariana Mazzucato
Excerpt via Fortune
In 2009, the U.S. Department of Energy (DoE) issued nearly identical loan guarantees to Tesla ($465 million) and Solyndra ($500 million), a solar panel manufacturer. While Tesla succeeded, Solyndra declared bankruptcy just two years later, attracting intense public scrutiny. The US government suffered the public backlash and cost from Solyndra’s failure but received nothing from Tesla’s success. Under the original agreement, the government would only receive three million shares if Tesla failed — a counterintuitive arrangement, since public stakes in struggling companies rarely benefit taxpayers.
A more effective approach would have granted the government shares only if Tesla succeeded, allowing taxpayers to benefit from the company’s growth.

Please note that the links to books above are affiliate links with Amazon.com and James Picerno (a.k.a. The Capital Spectator) earns money if you buy one of the titles listed. Also note that you will not pay extra for a book even though it generates revenue for The Capital Spectator. Thank you!

Fed funds futures are pricing in a 67% probability that the Fed will raise its target rate at next week’s policy meeting, although that forecast is still close enough to a coin flip to keep Wall Street guessing.

The policy-sensitive US 2-year Treasury yield, by contrast, is reflecting higher confidence that a rate hike is near. The 2-year yield surged yesterday, rising to 4.59%, which marks the widest premium over the Effective Fed Funds Rate in nearly four years.

Although Warsh has been careful not to expressly call for higher yields in the bond market, several of his comments suggest he’s comfortable with tighter financial conditions and thinks inflation remains too high and that borrowing costs should therefore remain elevated.

One example: “I would be hard-pressed to describe broad financial conditions as restrictive,” he said last month at the Jackson Hole conference. “Real consumer spending has been healthy despite the shocks…” and “On the employment side of the Fed’s dual mandate, our country is doing well. Labor markets are quite stable.”

These and related comments imply that Warsh sees long-term rates as not yet sufficiently tight to restrain inflation, although perhaps less so in the wake of the rise in yields since he spoke last month.

He also said at Jackson Hole: “We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do.” Some analysts have interpreted this statement as a sign that Warsh sees higher interest rates as necessary if inflation remains elevated.

Warsh was somewhat clearer on policy when he observed in late August: “Inflation is running above our 2% target. So the Fed’s predominant focus right now should be on prices.”

Perhaps the closest he came at Jackson Hole to seemingly endorse the bond market’s ability to implement tighter policy when appropriate was this observation: “To get policy right, we also need to get the relationship right between financial markets and the central bank. The Fed needs clear market signals, as unfiltered as possible.”

The runup in Treasury yields this month certainly looks like an unfiltered signal, and one that’s increasingly leaning into a hawkish pivot. The 10-year yield soared on Thursday, spiking to 4.97%, which is close to a three-year high.

In July, he was unequivocal that the Fed’s 2% inflation target remains the goal: “Let me reiterate: There is no soft inflation target … There’s only a target, and it’s 2%.” With inflation running above that mark, in some cases substantially so, depending on the metric, it’s easy to infer that some form of policy tightening is his preference, which in turn plays into the idea that’s fine with higher Treasury yields.

Even if Warsh’s preference for letting the market do the work of lowering inflation is accurate, there’s a potential glitch: the Treasury Department appears to be working at cross purposes. Treasury Secretary Scott Bessent’s recent efforts to expand government bond buybacks in an effort to push long-term borrowing costs lower could potentially undermine the Fed’s inflation fight.

Treasury’s efforts have, so far, failed, but a potentially conflicting dynamic may be brewing. If Treasury continues to ramp up its purchases, the program could eventually offset Warsh’s goal of market-driven tightening that would otherwise help restrain inflation.

Clarity from the Fed and Treasury, ideally through a unified message regarding their shared goals, would be helpful for the market. At the moment, however, their actions appear to be pulling in different directions, creating unnecessary uncertainty about the outlook for inflation and interest rates.

Next week’s Fed meeting and press conference offers Warsh an opportunity to explain the broader game plan: whether higher long-term yields are a desired feature of the inflation fight and how that view squares with Treasury policies aimed at pulling those same yields lower.

Is Recession Risk Rising? Monitor the outlook with a subscription to:
The US Business Cycle Risk Report

Nearly a month ago, Bessent announced that the Treasury Department would double the size of its standard government buyback program. On Wednesday, Treasury upped the ante to $6 billion in an effort to cap, if not lower, the recent rise in yields. So far, the bond market has dismissed the effort and instead continued to push yields higher.

The 10-year yield rose to 4.84%, its highest level since October 2023. Yes, some of the increase can be attributed to a resilient US economy. Yet the administration’s preference for taunting the bond market and claiming that “the yields don’t reflect the underlying fundamentals” while shunning meaningful spending and tax-policy reform to control the government’s ballooning debt could be laying the groundwork for a crisis.

To be fair, Congress (both parties) is complicit in the fiscal train wreck that is unfolding. No one knows where the tipping point lies, but the benchmark 10-year yield is probably the best real-time indicator for assessing the market’s tolerance for the years-long policy of letting red ink pile up with little, if any, effort to stem the tide.

A key level for the 10-year yield may be 5%, which could be breached within days. There’s nothing magical about that mark, and it’s not obvious that crossing it would trigger significant changes in markets or Washington. But doing so would surely focus minds and stimulate discussion by highlighting a 19-year high for what has been called the most important interest rate in the world.

An ongoing rise in the 10-year yield will increasingly become a referendum on the government and its capacity to act responsibly in the fiscal sphere. The market’s reaction so far is clear: the increase in bond buybacks has earned a decisive thumbs-down, in part because even a $6 billion-per-operation amount is merely a drop in the bucket of the more than $30 trillion US government debt market.

Fiscal anxiety is only part of the bond market’s concern. Inflation uncertainty is also part of the mix. Federal Reserve Chairman Kevin Warsh has been playing his own game of chicken with markets, albeit with more subtlety and nuance. In his public comments since taking the helm at the central bank, he has repeatedly stressed that inflation remains too high and, as he said last month, “It is the Fed’s job to deliver stable prices.”

That’s what you would expect a central banker to say and, at face value, it is reassuring and timely, given that inflation has been running above the Fed’s 2% target for more than five years. But what exactly does the chairman’s lofty statement mean for monetary policy in the near term? Warsh has been cagey about specifics, preferring to refrain from so-called forward guidance and avoiding discussion of the economic and financial conditions that would trigger rate hikes.

If Treasury yields continue to rise, pressure on the Fed will increase to tighten policy, perhaps as early as next week’s FOMC meeting. Indeed, we may be at the point where nothing less than a more restrictive monetary stance will calm the bond market by signaling that the Warsh Fed will remain independent of political influence and stay focused on its dual mandate of stable prices and full employment.

Ideally, a hawkish pivot at the Fed would be reinforced by a White House and Congress willing to show some backbone and take a step or two toward fiscal probity, if only in talking about the topic. I’m not holding my breath, especially with the midterm elections less than two months away.

The question is whether the bond market’s patience is running thin. We’re now at the point where higher yields from this point may start to have conspicuous spillover effects for the stock market and the wider economy.

A possible sign of things to come is found in the latest commentary from Norway’s sovereign investment fund, the world’s largest investor in terms of a single portfolio. Reading the writing on the market walls, the fund advised that it was timely to consider reducing the weight of government debt in its fixed-income allocation. The reasoning:

The degree to which bonds will contribute to dampening volatility in future crises, will depend on the nature of the crisis. For example, one might expect government bonds to not have the same volatility-dampening effects in a government bond crisis… We further recommend that the government subindex be weighted by market value instead of GDP, since high government debt is now a general feature of developed economies rather than a distinctive feature of a few countries.

No one will ring a bell when the regime shift arrives. But to quote Dylan, “It’s not dark yet, but it’s getting there.”

Is Recession Risk Rising? Monitor the outlook with a subscription to:
The US Business Cycle Risk Report

The narrow drivers of the market’s performance this year are both good news and bad. They are good in the sense that the reasons for the upside momentum in these sizzling sectors are intact. They are bad because even a modest shift in the underlying drivers could have substantial repercussions for broad market indices.

Consider how the stock market’s performance stacks up so far in 2026 through a sector prism, based on a set of ETFs. Soaring energy shares (XLE) and surging tech stocks (XLK) are the upside outliers by a wide margin. As a result, the SPDR S&P 500 ETF (SPY) is outperforming most of its sector components with a 12.9% year-to-date return.

Energy stocks have been strong all year, and continue to find support in the Iran conflict that’s flared up again lately. After the Islamic Revolutionary Guard Corps attacked two American warships in the Persian Gulf, the US retaliated and struck five Iranian tankers. The news pushed the price of crude oil above $100 a barrel on Wednesday for the first time since July, based on Brent, the international oil benchmark.

Energy exports through the Strait of Hormuz have remained at a fraction of pre-war traffic, and the latest escalation of fighting in the region will likely keep shipping flows low. A new forecast from Goldman Sachs advises that intensification of the conflict could raise Brent oil above $120 a barrel.

“The main forces driving prices higher remain geopolitical conflict in the Middle East, both the U.S.-Iran conflict in the Persian Gulf and the confrontation between Saudi Arabia and the Houthis in Yemen, as well as the Russia-Ukraine war,” Eurasia Group analysts wrote in a report. “A shortage of global refining capacity has added further upward pressure, alongside sustained demand for refined products.”

Meanwhile, tech stocks continue to benefit from “AI-driven earnings durability,” in the words of Venu Krishna, head of equity strategy at Barclays. A “standout earnings season” led by technology prompted the investment bank to raise its year-end S&P 500 target to 7,950 from 7,800, a forecast that, if correct, equates to a 3.6% rally by December 31 from yesterday’s close.

The latest earnings data highlights the outsized influence of energy (followed by tech) for animating the bullish tone. “At the sector level, four of the eleven sectors witnessed an increase in their bottom-up EPS estimate for Q3 2026 from June 30 to August 31, led by the Energy (+11.8%) sector,” writes John Butters at FactSet. “On the other hand, seven sectors recorded a decrease in their bottom-up EPS estimate for Q3 2026 during this period, led by the Materials (-9.1%) sector.”

AI optimism and the risk of a wider Iran conflict are keeping technology and energy stocks humming. But the market’s dependence on these powerful themes also creates vulnerability. If AI adoption falls short of lofty expectations or tensions in the Middle East ease, the pillars supporting the rally could weaken. For now, investors see both risks as unlikely in the near term. Even so, with gains increasingly concentrated in just two narratives, any meaningful shift in either could have an outsized effect on broad equity benchmarks.

Let’s start with the good news. Today’s Q3 GDP nowcast tracks at a 2.4% annualized increase, based on the median of multiple estimates compiled by The Capital Spectator. If correct, economic activity will accelerate from Q2’s modest 1.5% increase. The government’s official data for the current quarter is scheduled for release on Oct. 29.

Today’s median nowcast ticked up from our previous 2.3% estimate on Aug. 24. Three of the component inputs are above the median, led by the Atlanta Fed’s GDPNow model, which is nowcasting a sizzling 4.7% increase (as of Sep. 3). That looks high relative to the median, but the common ground is that all the nowcasts anticipate a robust pickup in economic activity relative to Q2.

Last week’s update of PMI survey data aligns with the upbeat Q3 estimate. “Business activity growth across the private sector accelerated in August, marking a clear shift in gear for the US economy,” said Usamah Bhatti, Economist at S&P Global Market Intelligence.

The Dallas Fed’s Weekly Economic Index (WEI) has also rebounded and is currently projecting that year-over-year GDP growth is 3.1% (through Sep. 3), marking a strong improvement over the 2.1% rise in Q2.

The latest hard data for the labor market is also signaling stronger growth. Non‑farm payrolls rose 162,000 last month — far above the 55,000 consensus forecast and the strongest monthly increase since March. The rebound is less dramatic for the private sector, but hiring momentum among companies remains solid.

The question is whether gathering clouds on the macro horizon will bring challenges in the months ahead. The combination of various risk factors will surely test the economy. The short list of worrisome stress catalysts:

• Rising US Treasury yields
• Ongoing inflation anxiety
• Continuing hostilities with Iran
• Elevated energy prices
• Increasing trade‑war risk, including renewed tensions with Canada
• AI fatigue as Wall Street shifts from the growth narrative to the mounting capital costs of the buildout
• Growing US fiscal vulnerability as widening deficits, rising interest costs, and a deteriorating debt profile threaten to become a macro drag

Any one or two of these risks would be concerning but arguably manageable. The combination, however, could create headwinds strong enough to slow or reverse the economic momentum that appears to be unfolding in Q3.

To be fair, some hazards could fade. A durable peace deal with Iran, for example, would ease pressure on energy prices and inflation. Meanwhile, the bond market could rally if Congress and the White House begin to address the deteriorating fiscal profile. On the AI front, optimists may be right that the technology will deliver productivity gains that support Treasury Secretary Bessent’s view that “we can grow our way out of that,” offered in response to news that the US national debt has topped $40 trillion for the first time.

For the moment, the Q3 GDP nowcasts offer a degree of support for Bessent’s rosy outlook. Whether his upbeat view reflects a reasonable scenario or mere wishcasting remains an open question — one that the incoming data will increasingly clarify as the year winds down.

Is Recession Risk Rising? Monitor the outlook with a subscription to:
The US Business Cycle Risk Report

Happy Labor Day!

● The Architecture of Wealth: The Art and Science of Portfolio Construction
Andrew S. Clarke, et al.
Summary via publisher (Wiley)
The Architecture of Wealth: The Art and Science of Portfolio Construction, by experienced investment researchers Andrew Clarke and Nelson Wicas with portfolio manager Ganesh Suntharam, is an in-depth strategy guide for building a portfolio using techniques that reliably result in superior returns. In the book, the authors outline the theory underlying modern portfolio construction, from the development of modern portfolio theory in the 1950s and 1960s to recent developments in behavioral economics. They also discuss the trial-and-error and compromise necessary to translate theory into real-world investing decision. Finally, the authors explain the advanced methodological and analytical techniques that they’ve used for over three decades to identify promising investing opportunities.

● The Retire Sooner Method: The 5 Secrets Behind America’s Happiest (and Unhappiest) Retirees
Wes Moss
Essay by author via Forbes
Retirement planning has often been presented as a math problem: accumulate a certain nest egg, apply a withdrawal rate, and hope the numbers hold up for 25 or 30 years.
In my latest book, The Retire Sooner Method, I take a much broader view: Financial preparation remains essential, but our research suggests that a more fulfilling retirement may also depend on how people plan for purpose, relationships, health, and the daily structure of life after work.

● The Price of the World: A Global History of Capitalism
Friedrich Lenger
Summary via publisher (Polity)
Over the last 500 years, capitalism has produced a world that is highly interdependent and at the same time highly asymmetrical. These asymmetries were often established by violent means and are in many cases vigorously defended to this day. In his ambitious global history of capitalism, Friedrich Lenger charts the course of these developments, which have left no one unaffected – from the indigenous people of America to the silk weavers of Bengal. This is a story of flagrant wealth and extreme poverty, of violence and oppression, and of the relentless exploitation both of labour and of our planet, for which we are now paying the price.

● How Economics Discovered Women: Bringing Gender Economics into the Twenty-First Century
Shelly Lundberg
Summary via publisher (U. of California Press)
In the 1970s, as women started to enter the labor force in unprecedented numbers, economists began to examine their roles as economic actors. The result was the rise of gender economics, now a major subfield with powerful data and new methods comparing the economic lives of men and women. Yet despite decades of progress, many of the most consequential questions about gender inequality remain unresolved. In this bold and reflective book, renowned economist and demographer Shelly Lundberg argues that the problem is not a lack of evidence but a failure to challenge entrenched economic models and outmoded assumptions about markets and gender that have limited what the field can explain.

Please note that the links to books above are affiliate links with Amazon.com and James Picerno (a.k.a. The Capital Spectator) earns money if you buy one of the titles listed. Also note that you will not pay extra for a book even though it generates revenue for The Capital Spectator. By purchasing books through this site, you provide support for The Capital Spectator. Thank you!

In a speech yesterday, Waller argued that keeping rates steady still has merit. “Recent data suggest we are finally seeing some signs of disinflation.” He added: “If this continues in the data due over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting.”

He also advised that next week’s update on the Consumer Price Index could be a determining factor. “If the incoming data for August show this improvement has been fleeting, then it may be appropriate to raise the policy rate when the FOMC meets on September 15 and 16.”

Intentional or not, Waller’s comments helped shift market expectations to a coin flip for the rate decision later this month. At the start of the week, Fed funds futures were pricing in a 60%-plus probability that the central bank would lift its target rate by a ¼ point — an estimate that’s now split roughly 50/50.

The policy‑sensitive 2‑year Treasury yield fell yesterday but remains far above the effective Fed funds rate (EFF) — a sign that this corner of the bond market is still confident that a rate hike is near.

Looking directly at the 2‑year/EFF spread highlights the Treasury market’s growing confidence in anticipating tighter policy. The gap between the 2‑year yield and EFF has been positive and rising since early March, a trend that underscores the extent of hawkish sentiment among bond traders. The spread fell to 71 basis points yesterday, likely in reaction to Waller’s comments, but it remains close to Tuesday’s level, which marked a four‑year high.

Despite the bond market’s cautious outlook for pricing relief, the case for expecting disinflation in the economy is reasonable — at least under certain assumptions. But as long as the Iran conflict continues and blocks energy exports from the Gulf, any disinflation impulse will be muted.

Counting on the economy to cool as a source of disinflation may also be premature. The Atlanta Fed’s GDPNow model nowcasts that economic output will rebound sharply in next month’s third‑quarter GDP report to a strong 4.7% annualized increase — far above Q2’s modest 1.5% rise.

Meanwhile, the recent rise in longer‑term yields reflects risks beyond the Iran war and includes heightened concerns about U.S. government debt, which topped $40 trillion for the first time last month. National debt as a percentage of GDP is still well below the peak reached during the Covid pandemic, but the Congressional Budget Office projects that the debt‑to‑GDP ratio will continue rising in the years ahead, increasing from the current 5.8% to 6.7% in 2036.

Adding to the bond market’s concern is the near‑zero appetite in Washington for fiscal reform. With the mid‑term elections on the horizon, it’s a safe bet that the hard questions surrounding government spending and taxes will remain conveniently ignored between now and Nov. 3.

A surprisingly tame inflation report next week might put a lid on further increases in Treasury yields for the immediate future. But as the upward trend in the 10‑year yield suggests, the mix of factors driving the repricing of risks won’t be easily or quickly resolved.

A sharp, sudden slowdown in the economy would change sentiment in the bond market, but that scenario appears unlikely in the near term. Meanwhile, if the August consumer price inflation data continue to show no relief on pricing pressure, Treasury yields are poised to push higher and set new multi‑year highs.

Waller may be preaching patience — but it’s not yet clear the bond market is ready to sit quietly through the sermon.

Learn To Use R For Portfolio Analysis
Quantitative Investment Portfolio Analytics In R:
An Introduction To R For Modeling Portfolio Risk and Return
By James Picerno