Author: Zac Martin, Senior Investment Analyst
Week Ending August 21st – Rate Pressure
Interest Rates: The biggest story moving markets over the past several weeks has been interest rates. The 10-Year US Treasury rate continued to climb to its highest rate since the Federal Reserve stopped raising rates in 2023. Additionally, the 30-Year US Treasury rate climbed to its highest rate since 2007. There are a few economic variables that may be contributing to a rise in yields, analysis below.
$40 Trillion: One possible contributing factor is that the US debt just crossed $40 Trillion for the first time in US history. This is a staggering 123% debt-to-GDP and is likely unsustainable. There are several pathways out of this, miraculous economic growth, a stop to deficit spending, or devalue the dollar, i.e. inflation. The bond market may be pricing in the latter option as a likely possibility. Indeed, Treasury Secretary Bessent has indicated that the administration has an appetite for a degree of financial engineering to alleviate the increase in interest rates. In fact, the Treasury just announced a plan to buyback long dated bonds while issuing short term treasuries as a funding source for the purchase.
A Split Fed: The FOMC has remained split regarding rate decisions, with 9-3 in favor of holding rates. The three that dissented were in favor of raising rates by 25bps. Also, Fed Chair Warsh has signaled to the market that the Fed is likely going to play less of a roll in monetary policy opting for markets to set interest rate policy. The bond market has had no problem taking over for the Fed, given the climb in interest rates.
Crowding out with AI Financing: Finally, US Treasuries have had significant competition from corporations so far this year, specifically, as it relates to AI spending. The major hyperscalers have issued over $150Bln in debt over the last year, with most of these companies maintaining a AA rating. Additionally, there is $1.35T in off balance sheet debt that has been issued over the last year, according to Nikkei. This substantial amount of Investment Grade supply may be crowding out US Treasuries and contributing to a higher interest rate.
The Week Ahead:
- Personal Consumption Expenditures (8/26)
- Q2 2026 US GDP Second Preliminary (8/26)
- NVDA Earnings on Wednesday (8/26) after market close
- 2026 Jackson Hole Economic Policy Symposium (8/28)
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