Daily Commentary

MarketMinder’s View: This is a nice look at the fact the recent upturn in bond yields seems to be mostly investors speculating on what the Fed may or may not do as opposed to widely hyped headlines around inflation expectations and deficits. Simply, real rates (the article cites several measures) aren’t up a ton as of late, which isn’t what you would expect if either of those factors were really the central issue. More to this point: Per FactSet data, the increase in Treasury yields is larger at the shorter- or medium-term part of the curve than the long end. Since July 31, 30-year Treasury yields are up just 0.09 percentage point (ppt)—scarcely a wiggle. 20-year yields? 0.12 ppt. 10-year yields have climbed more, 0.27 ppt, while 5-year and 2-year yields are up 0.39 and 0.38 ppt, respectively. Since the Fed exerts its maximum control at the short end, this movement suggests to us we are seeing markets sway on Fed actions. That is largely a sentiment function that can reverse fast. It doesn’t even need to be for all the reasons documented at the end of this piece. It could be as simple as markets pre-priced a move at the meeting, the meeting comes and reality arrives (with a hike or no). A “buy the rumor, sell the news” type of action.

MarketMinder’s View: As always, please note MarketMinder is nonpartisan. Our analysis focuses on politics’ economic and market implications only. In that vein, guess what is back in headlines: the debt ceiling! “Analysts project the U.S. will breach the $41.1 trillion debt ceiling at some point in 2027, requiring Congress to raise or suspend it before the Treasury Department runs out of ‘extraordinary measures’ to avoid a catastrophic default. If Democrats capture one or both chambers of Congress in November’s midterm election, it would open the door to a standoff as the party tries to extract policy wins from Republican President Donald Trump in exchange for averting a bumpy ride over the fiscal cliff.” We share this commentary for a couple reasons. First, warnings about a supposedly negative event to come in 2027 speaks to how dour sentiment has become recently—when headlines are hyping up possible problems next year, it won’t take much for reality to exceed expectations. Second, all this handwringing is over a well-established false fear: breaching the debt ceiling does not mean default, full stop. It is the statutory limit on outstanding bonds, but it allows existing ones to be refinanced, tax revenue covers interest five times over and the 14^th amendment requires Uncle Sam to pay Treasury interest first. The debt ceiling has been raised (often following fights) more than 100 times and is overwhelmingly likely to be this time too, whether in the “lame duck” post midterm vote or the new congress. As the latter half of the article acknowledges, “Democrats will also be hesitant to agree to raise the debt ceiling if they win the election in November, given that it represents one of their most crucial points of leverage over the White House.” This is why the debt ceiling remains a story—it is one of politicians’ favored talking points—one often used to extract concessions from opposing parties. For more, see last year’s commentary, “What to Know as the Debt Ceiling Stalks Headlines.”

MarketMinder’s View: As this article references several companies, please note MarketMinder doesn’t make individual security recommendations, and any mentioned here are coincident to a broader lesson we wish to highlight. Remember last year when headlines presumed President Donald Trump’s “Liberation Day” would lead to the permanent alteration of global supply chains and trade routes? Turns out reality has proven a bit more complicated. “A year after shifting production and sourcing out of China to avoid higher U.S. tariffs, some companies are learning that replicating the country's factory ecosystem is not so easy and are bringing manufacturing back. … While there is not yet hard data showing how much sourcing is returning to China, some buyers who shifted production elsewhere said they are keeping or restoring Chinese suppliers because factories abroad struggle to match its skilled labour, supplier networks and reliable power.” The back half of the piece points out China’s well-entrenched advantages (e.g., steady power supply), though some exporters acknowledge that other manufacturing hubs (e.g., Vietnam) aren’t going away, either. To us, this dynamism illustrates why investors shouldn’t presume that policies like tariffs have clear-cut, linear consequences: Yes, some businesses may move operations to avoid duties, but those logistics can incur other unforeseen costs. For more, see our February commentary, “A Cool-Headed Take on the NY Fed’s Tariff Research.”