Category: Inflation

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What’s Driving Bond Yields?

What’s driving bond yields higher?

Is it the war with Iran, rising crude oil and diesel prices, fertilizer shortages, tariffs, expanding government deficits, semiconductor shortages, or increased AI borrowing?

All of the above expand demand for credit, reflected in rising nominal GDP growth, which competes for a limited supply of available credit.

Nominal GDP & 10-Year Treasury Yield

Credit Supply

Credit supply isn’t growing at the same rate.

Foreign investment in US Treasuries has slowed. Japan and China have both shed more than $100 billion in the 6 months to August.

Foreign Holdings of US Treasuries

Total foreign holdings of US Treasuries fell by $155 billion over the last 6 months.

Foreign Holdings of US Treasuries

Increased holdings by the United Kingdom, Canada, Belgium, Luxembourg, and the Cayman Islands partly offset declines in Japanese and Chinese Treasury holdings. However, only Canada has a trade surplus with the US. Most of the balance reflects custodial accounts in major financial centers used by sovereign wealth funds, multinational companies, insurance companies, pension funds, and hedge funds engaged in highly leveraged Treasury market trades.

Norway’s $2.3 trillion sovereign wealth fund, the world’s largest, has also proposed significant cuts to its government bond holdings. US Treasuries are its largest bond holding, and will be cut by $80 billion to $135 billion in 2027, according to the proposal by fund manager Norges Bank. An increased allocation to non-government bonds would partly offset the decline, but overall exposure to the Dollar would fall.

In addition, Europe’s largest pension fund, the Dutch ABP, cut exposure to US Treasuries in the first quarter. (Reuters)

Bank credit growth is also slowing. The quarterly increase in loans, leases, and securities held by banks fell from $400 billion in Q1 to $200 billion in Q3.

Commercial Bank Credit: Loans, Leases, and Securities

Aggregate Demand

Activity, reflected by nominal GDP, is expected to accelerate in Q3.

The GDP price deflator jumped to 4.0% in Q2 of 2026.

GDP Implicit Price Deflator

The sharp increase reflects a 1.5% rise in Q2.

GDP Implicit Price Deflator

We expect at least a similar Q3 increase of at least 1.5%, taking the annual GDP deflator to 4.6% or more.

The Atlanta Fed GDPNow model projects that real GDP will grow at an annual rate of 3.6% in Q3.

Atlanta Fed GDPNow

That would increase annual growth to 2.1% over the four quarters, with nominal GDP rising to 6.7% or more.

Conclusion

If the Fed, under new Chair Kevin Warsh, lets market forces set interest rates, we expect the 10-year Treasury yield to rise above nominal GDP growth, which we expect to reach 6.7% in Q3 of 2026. That is the typical monetary policy path prior to 2000, before lax policy measures set the US on the path to the current debt-inflation standoff.

10-Year Treasury Yield & Projected Nominal GDP Growth

If the Fed changes tack and intervenes in the Treasury market by buying Treasury securities to suppress long bond yields, it will restore the imbalance and allow inflationary pressures to build.

In the first scenario, as the 10-year yield rises further, we expect demand to contract, stocks to fall, and the economy to go into recession. That would cause long-term yields to fall as nominal GDP growth slows. A new, more stable balance would then improve long-term growth.

In the second scenario,  the Fed introduces further QE, suppressing the 10-year yield as the supply of available bonds shrinks. Nominal GDP growth would accelerate as the gap widens, driving inflation higher. Stocks and Gold would rise until the Fed is forced to tighten monetary policy to curb inflation. This second path is unsustainable and would lead to higher volatility and more extreme boom-bust swings while long-term growth suffers.

Acknowledgments

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Asian Stocks Plunge on Fed Rate Hike Fears

Key Points

  • Headline CPI increased to 3.7% for the 12 months to September, up from 3.4% in August.
  • Energy prices rose 20.4% year-on-year, signaling stronger inflation ahead.
  • Financial markets now expect at least a 25-basis-point rate hike in December.
  • Investors reacted to the threat of higher interest rates slowing the AI rollout, with the Philadelphia Semiconductor Index falling more than 4%, and South Korea’s KOSPI index shedding more than 8.0% in Thursday trading.
  • The IMF’s quarterly Financial Stability Report this week also highlighted the potential for market turmoil, citing a correction in AI-related asset prices, rising sovereign debt yields, and the impact of AI frontier models on cybersecurity as key risks.

The headline consumer price index increased to 3.7% for the 12 months to September, up from 3.4% in August. Core CPI (excluding food and energy) increased to 2.6% from 2.4% in August.

CPI & Core CPI - Annual

Energy prices climbed 20.4% (right-hand scale below) over the 12 months, warning of a sharp rise in CPI that tends to follow with a 1- to 2-month lag, as in 2021-2023 below.

CPI & CPI Energy - Annual

Gasoline prices remain high, at $4.33 per gallon on October 12.

EIA US Gasoline Prices

Diesel eased slightly to $6.18 per gallon on measures to ease the shortage ahead of the November midterms. However, reserve releases aren’t a long-term solution, and the Persian Gulf conflict will likely drag on into next year.

EIA US Diesel Prices

Financial Markets

Several Fed speakers have hinted that the Fed won’t raise rates at the October (27-28) FOMC meeting, but will hike again in December (8-9). The 2-year Treasury yield jumped to 4.95% after Thursday’s CPI report but has since settled at 4.70%. That is still 70 basis points above the Fed’s current target range of 3.75%-4.00%, implying at least 3 more 25-bps hikes.

2-Year Treasury Yield (CNBC)

High-yield bond spreads have jumped more than 2.0% since Kevin Warsh’s keynote address at Jackson Hole on August 28, to above 12%. Widening spreads warn of likely distress among small- and mid-cap borrowers when their current debt matures and they must roll it over at much higher rates.

High-Yield Bond Spreads

Stocks

The Russell 2000 Small Caps ETF (IWM)2 is testing secondary support at 270 on the weekly chart below, while declining Trend Index peaks signal selling pressure. A breach of 270 would indicate a correction to test primary support at 240.

Russell 2000 Small Cap ETF (IWM)

The S&P 500 remains in an uptrend, but retreated  1.1%, its largest daily loss since July, as the Philadelphia Semiconductor Index fell more than 4%.

S&P 500

A breach of primary support at 11,000 in the Philadelphia Semiconductor Index (SOX) would be a strong bear signal for stocks.

Philadelphia Semiconductor Index (SOX)

Asian Stocks

South Korea’s KOSPI index fell more than 8.0% in Thursday trading.

KOSPI Index

A sell-off in global technology hardware stocks deepened Thursday, with Asian chipmakers tracking Wall Street losses as concerns over further Federal Reserve interest rate hikes, financing of artificial intelligence investments weigh on sentiment.

South Korean chip giant SK Hynix plunged over 10%, while rival Samsung Electronics fell 7.1%.

In Japan, technology investment giant SoftBank Group tumbled 7.9%. Semiconductor testing equipment maker Advantest dropped 6.9%, while chipmaking equipment supplier Tokyo Electron lost 5.4%.

….The declines come as investors grow increasingly concerned that higher borrowing costs could weigh on the massive capital spending required to build out AI infrastructure, putting pressure on technology companies that have benefited from the AI investment boom.

Chief executives of Broadcom and Intel warned on Monday that financing could become a major headwind to the AI boom, with Broadcom’s Hock Tan saying it could be bigger challenge to AI expansion than shortages of chips or electricity. (CNBC)

Treasury Market

10-year Treasury futures caught a bid, with yields falling to 5.10% from 5.30% earlier in the month as funds increasingly flow from equities to bonds.

10-Year Treasury Yield

The IMF earlier warned in its quarterly Financial Stability Report of the potential for market turmoil, citing three salient risks that could be near-term catalysts for a sharp tightening of financial conditions:

First, although core firms in the AI ecosystem have been profitable so far—easing pressure on AI-related equity valuations—weaker or less durable investment and profitability in AI could trigger a correction in AI-related asset prices, exacerbated by rising leverage, concentrated exposures, and circular financing arrangements.

Second, resurgent inflation or fiscal concerns could trigger a sharp rise in sovereign bond yields and spark broader market turmoil given the foundational importance of sovereign bonds. High public debt and rollover risks remain unresolved, increasing the chances that a rise in yields could occur in a disorderly manner, despite stable bond market liquidity and the recent unwinding of some leveraged trades.

Third, cyber threats constitute a growing systemic risk as financial services become more digital and interconnected. For their part, frontier AI models are emerging as both powerful enablers of cyberattacks and critical defensive tools. These risks by themselves do not necessarily threaten financial stability, but they could become a systemic risk—impairments to key financial intermediation and credit provision, with serious negative economic effects—if they are amplified by financial vulnerabilities.

The report also highlighted hedge funds’ highly leveraged repo positions and pursuit of crowded trades that “could amplify market stress, with spillovers to prime brokers and broader financial markets”.

Dollar & Gold

The Dollar has strengthened on the prospect of higher interest rates, with the Dollar Index testing resistance at 103 before retracing to test new support at 102.

Dollar Index

Gold weakened on the prospect of higher interest rates and a stronger Dollar, and will likely test primary support at $4,000 per ounce.

Spot Gold

Conclusion

Financial markets are unsettled by the threat of higher inflation driving up interest rates, which could interfere with funding of the AI data center rollout. Stocks are selling off as investors move into bonds, which has lowered the yield curve by roughly 20 basis points in a few days.

South Korea’s KOSPI and Japan’s Nikkei indices are falling, and a Philadelphia Semiconductor Index (SOX) breach of primary support at 11,000 would be a strong bear signal for US stocks.

A Bitcoin1 retreat below support at 80,000 would confirm a market shift to risk-off.

Bitcoin (BTC)

The last two weeks of October are typically a precarious time for stocks, as fund managers reposition after the end of the financial year. We advise stock traders to keep stops tight and investors to adopt a defensive stance by shedding more volatile assets.

Rising interest rates and a strengthening Dollar are bearish for Gold, which is expected to test primary support at $4,000 per ounce. However, the underlying forces driving higher rates—inflation, poor fiscal management, and bond market instability— are all bullish for Gold. We remain long-term bullish on Gold and view the current sell-off as an opportunity for steady accumulation.

Acknowledgments

Notes

  1. Cryptocurrencies are the highest-risk asset class, and we analyze Bitcoin (BTC) solely to identify risk sentiment in financial markets. Our analysis is not a recommendation to buy or sell BTC, nor is it a commentary on the merits of cryptocurrency.
  2. We analyze exchange-traded funds (ETFs) to determine market sentiment towards a specific sector, industry, or commodity. The analysis is not a recommendation to buy or sell, nor is it a commentary on the merits of the particular ETF.
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RBA Hikes, ASX 200 Rallies

Key Points

  • The RBA hiked its cash rate target by 25 basis points to 4.6% today.
  • Monthly CPI jumped to 4.0% in August, up from 3.5% in July.
  • A further rate hike is expected at the next RBA meeting.
  • The ASX 200 rallied to test resistance at 8800.

The RBA has grown more hawkish since its last meeting, spurred by a sharp rise in diesel and petrol prices that threaten to feed through into higher prices.

RBA Cash Rate Target

The average diesel retail price increased to 286.7 cents last week, with the wholesale price rising to 273.5 cents per liter.

Australian Diesel Price

CPI jumped to 4.0% in August from 3.5% in July, while the trimmed mean held steady at 3.6%.

Australian CPI & Trimmed Mean CPI

Tradables inflation (2.9%), reflecting prices for imported goods, rose sharply on higher fuel prices. Non-tradables (4.5%) reflect strong domestic inflation for services such as rent and education.

Australian CPI: Tradables & Non-Tradables

Annual inflation of 5.7 per cent for Housing reflected rising costs for both New dwellings and Electricity. New dwelling prices rose 5.4 per cent in the 12 months to August as builders passed on higher costs for materials and labour.

Transport was the second largest contributor to annual inflation in August, rising by 5.6 per cent due to higher automotive fuel prices.

On a monthly basis, Automotive fuel prices rose 14.8 per cent in August, compared to a rise of 7.5 per cent in July. This was driven by higher world oil prices and the unwinding of the remainder of the federal governments fuel excise relief measures in August. (ABS)

Nominal GDP slowed slightly to 5.3% for the June quarter.

Australian Nominal GDP Growth

Australian bond yields, at 4.95% for the 2-year and 5.25% for the 10-year, closely shadow nominal GDP growth, indicating the RBA is maintaining neutral monetary policy.

Australian Government Bond Yields

However, private credit is still growing at an annual rate of 8.4%, well above NGDP growth, suggesting that further tightening is necessary.

Australia: Credit and Broad Money Growth

Westpac Chief Economist Luci Ellis says “the bar for a November rate hike is very low” and she now expects a further hike to 4.85%.

The ASX 200 shrugged off the rate hike, rallying to test resistance at 8800.

ASX 200 Index

Conclusion

The cure for high prices is high prices. Credit growth will likely fall if the 2-year AGB yield rises above nominal GDP growth.

Diesel shortages in the coming months could do far more damage than a rate hike.

Acknowledgments

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Something Has to Break

Key Points

  • The S&P Global US Composite flash PMI shot up to 58.4% for September.
  • 10-year Treasury yields jumped to 5.114%.
  • We expect 10-year yields to climb higher, causing a correction in stocks.
  • The S&P 500 retreated, heading for a test of support between 7500 and 7600.

The S&P Global US Composite flash PMI shot up to 58.4%, the fourth consecutive month of accelerating growth and the strongest expansion in private-sector activity since July 2021.

S&P Global Composite PMI

The move was echoed by a healthy rise in the European Union’s equivalent flash PMI to 53.1%.

S&P Global Composite PMI

The surge in economic activity boosted market expectations of further Fed rate hikes, with the 2-year Treasury yield jumping to 4.876% compared to the current Fed funds target range of 3.75% – 4.00%.

2-Year Treasury Yield

The 10-year yield broke through resistance at 5.0%, closing at 5.114%, the highest level in more than 20 years. We expect a retracement to test the new support level, but respect will likely confirm another advance. Our medium-term target is 6.0%.

10-Year Treasury Yield

The S&P 500 retreated to 7700 and is headed for a test of support between 7500 and 7600. A breach would signal a correction to test primary support at 7300.

S&P 500

The Outlook for Treasuries

The spread between the 10-year and 2-year Treasury yields is shrinking as in previous Fed rate-hiking cycles (red arrows below). A dip below zero typically precedes a recession. The dip below zero from 2022-2024 was an exception, caused by the unprecedented scale of fiscal and monetary stimulus during the pandemic.

10-Year Treasury Yield minus 2-Year Yield

The Atlanta Fed’s GDPNow model projects real GDP growth of 5.1% in the third quarter, a 3.6% increase from Q2.

Atlanta Fed GDPNow

Even without an increase in the GDP deflator, driven by rising energy prices, we expect nominal GDP to jump from an annual rate of 6.6% in Q2 to more than 10.0% in Q3.

10-Year Treasury Yield & Nominal GDP Growth

The strong divergence between nominal GDP and the 10-year Treasury yield would provide further stimulus to an already overheating economy, causing a sharp increase in inflation.

Conclusion

The Fed is trapped in an inflationary boom that will likely drive long-term yields much higher than 5.0%. Rising interest rates will increase the interest cost on the US Treasury’s $40 trillion debt, expanding the budget deficit above $2.0 trillion.

The Fed is constrained by its swollen balance sheet and will likely resist further QE to suppress long-term interest rates and assist the US Treasury.

Surging economic activity, compounded by crude oil and diesel supply shortages, is also expected to drive a sharp increase in inflation, adding to the Fed’s challenges.

Something has to break, and we are adopting a highly defensive posture, heavily overweight in Gold, short-term financial instruments, and defensive stocks with strong pricing power and stable income streams.

Acknowledgments

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US Diesel Hits a Record High

Key Points

  • Core CPI ticked lower to an annual rate of 2.4% in August, while headline CPI edged up to 3.4%.
  • However, rising producer prices warn of strong margin pressure that corporations will likely pass on to consumers through price hikes.
  • Energy prices are driving higher inflation, with diesel rising to a record $6 per gallon.
  • Houthi attacks on Saudi Arabia’s East-West Pipeline are expected to drive crude oil prices higher next week.
  • 10-year Treasury yields are testing resistance at 5.0%, while Gold softened to $4,350 per ounce.

Headline CPI edged up to an annual rate of 3.4% in August, while core CPI ticked lower to 2.4%.

CPI & Core CPI - Annual

For the month of August, headline CPI increased 0.40%, in line with expectations, while core CPI’s increase of 0.29% was higher than the expected 0.20%.

CPI & Core CPI - Monthly

CPI remains above the Fed’s target inflation rate of 2.0% but gives little warning of the expected inflation shock ahead.

Producer prices have risen 5.4% over the 12 months to August, warning of strong margin pressure that corporations will likely pass on to consumers through price hikes.

Producer Price Index (PPI)

Finished goods PPI reacts faster to higher energy prices, reaching an annual rate of 6.6% in August. While slower to react, Services PPI is also rising at 4.5%.

Producer Price Index (PPI): Goods & Services

Strong producer price rises are reflected in the ISM Non-Manufacturing (Services) survey. The Prices index climbed to 72.6%, the highest reading since July 2022, and the 21st consecutive month above 60%.

ISM Services Prices

Services Prices tend to lead US CPI inflation by 2 to 6 months, as shown in the longer-term chart below. The current divergence between ISM Non-Manufacturing Prices (blue) and CPI (red) warns of a sharp rise in CPI ahead.

ISM Services Prices

Energy prices are the primary driver of the current CPI spike, as in 2022 when energy prices soared 40% after Russia’s full-scale invasion of Ukraine, followed by a rise in CPI to 9.0%.

CPI & CPI Energy - Annual

Average US gasoline prices rose to $4.16 per gallon in September as crude prices climbed.

EIA US Gasoline Prices

However, distillates are taking the brunt, with average diesel prices rising to a record high of $6.00 per gallon.

EIA US Gasoline Prices

NEW YORK, Sept 10 (Reuters) – The U.S. national average price of diesel on Thursday surpassed $6 a ​gallon for the first time ever, according to price tracker GasBuddy, as the U.S.-Israeli war on Iran and Ukrainian attacks on Russia’s refineries have squeezed supply….

“Every truck, every delivery, every package, every grocery run just got more expensive,” GasBuddy analyst Patrick De Haan said ​on social media site X.

“Record diesel prices will impact every cargo, shipment, every delivery Americans are taking, and are likely to reignite inflation up and down the supply chain,” ​he said.

“In a span of five months, we’ve seen diesel prices more than double. It has rocked our cash flows,” said Alex Ryan, energy director at Kansas-based fuel supplier Oasis Energy. “There’s gotta be a tipping point, I just don’t know when or where it’s going to be,” he said….

U.S. diesel inventories stand ​13% below their five-year ⁠average, the Energy Information Administration said, at 106.3 million barrels. Stocks rose last week as refiners ran plants at full tilt to capture strong margins.

The U.S. diesel crack spread , a measure of refining margins, surged to a record high of $112.17 a barrel on Thursday, LSEG data showed.

U.S. distillate inventories are near multi-decade lows for this time of year, even with refiners operating ⁠at high ​utilization rates, said Linda Giesecke, director of refined products at Rapidan Energy. It will likely be difficult ​to rebuild stockpiles over the next two months as seasonal refinery maintenance gets underway.

Brent crude futures rose to $107 per barrel last week, before retracing late Friday to $104.60, testing new support at $100 per barrel.

Brent Crude Futures (ICE November'26)

Talk of new peace talks is meaningless, but the Trump administration is still able to manipulate oil futures by spamming the media. Iran is likely to increase its attacks on oil transit routes in the Middle East ahead of the November midterms. From Reuters:

“Some headlines of possible new talks in the Middle East are weighing ​moderately on oil prices today,” said UBS energy analyst Giovanni Staunovo. “I keep seeing near-term risks to the upside for oil prices, but we should expect ongoing high price volatility ​too.”

In a further development for Riyadh, satellite imagery showed smoke on Thursday in the vicinity of Saudi Arabia’s East-West Pipeline, vital for the kingdom to divert its crude exports away from Hormuz.

As more reporting said a pumping station on the pipeline had been damaged by Iran-affiliated militants, prices stayed lower.

“It’s surprising the oil market remains down in light of reporting that Houthi rebels attacked the East-West Pipeline, which ​would impact 7 million barrels of crude,” said Andrew Lipow, president of Lipow Oil Associates.

“Repairing a pumping station would require a lot more than repairing a break in the ​pipeline,” Lipow said.

Stocks, Treasuries & Gold

The S&P 500 continues to test short-term support at 7600. A breach would signal a secondary correction to test support at 7000.

S&P 500

The bond market is voting with its feet. 10-year Treasury yields are testing resistance at 5.0% ahead of next week’s FOMC meeting. Many pundits are projecting a rate hike on September 16 because of inflationary pressure. Still, the new Fed Chair Kevin Warsh would have to be really dumb to risk offending President Trump with a rate hike ahead of the midterms.

10-Year Treasury Yield

We expect the Fed to hold off on another rate hike at least until December, but that is likely to cause a strong backlash from the bond market, with the 10-year rising strongly above 5.0%.

We expect Gold to soften as the war in the Persian Gulf continues, testing support at $4,000 per ounce, but remain long-term bullish on its prospects.

Spot Gold

Conclusion

We expect rising energy prices to drive higher inflation over the next six months.

Rising long-term Treasury yields will likely be bearish for stocks.

Gold is expected to soften for another test of support at $4,000 per ounce as the war in the Middle East and crude oil shortages intensify. However, we remain long-term bullish on Gold due to rising fiscal deficits by G7 economies, coupled with strong Gold buying by central banks and private investors, especially in China, as the fiscal outlook deteriorates.

Acknowledgments

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Australian CPI Sticky But No Rate Hike

Key Points

  • Australian CPI remains stubbornly high, with a 1.0% monthly increase in July.
  • Trimmed mean CPI was unchanged at 3.6% on a year-on-year basis.
  • However, the unemployment rate rose to 4.5% in July, suggesting the RBA is unlikely to raise rates.

Australian CPI remains stubbornly high, with the Trimmed Mean, the RBA’s favored measure, holding firm at 3.6% for the 12 months to July.

Australian CPI & Trimmed Mean CPI

Headline CPI eased to 3.5% for the 12 months, but that reflects base effects from the 1.3% increase in July last year compared to a jump of 1.0% in July 2026.

Australian CPI - Monthly & Annual

Strong CPI in July increases the motivation for another RBA rate hike, but Justin Smirk at Westpac points out that the labor market is softening.

Unemployment rose to 4.5% in July, up from 4.4% in June.

Australia: Unemployment

Monthly hours worked declined by 12.5 million hours in July to 1,998 million hours in seasonally adjusted terms, a monthly fall of 0.6%.

Australia: Aggregate Monthly Hours Worked

Conclusion

We agree with Westpac that the RBA is unlikely to raise rates:

Market services inflation is above target but a softer than expected labour market and wage outcomes reduce the likelihood of a November rate hike. We believe the RBA is likely to remain on hold for the remainder of this year.

However, credit is growing at an annual rate of 8.5% and broad money supply at 8.0%. Real GDP growth of 2.5% for the 12 months to March 2026 suggests that underlying inflation is between 5.5% and 6.0% (the spread between the two measures and growth in output/GDP).

Australia: Credit and Broad Money Growth

Our calculation of underlying inflation is more than 1.0% higher than the RBA’s current cash rate target of 4.35%.

We will likely be stuck with high inflation for a while.

Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. ~ Milton Friedman

Acknowledgments

Notes

  1. Credit and money supply represent two sides of the same coin: bank lending and bank deposits. They only tend to diverge when the RBA injects liquidity to rescue the economy from a deflationary spiral, as in 2008, 2010-2013, and 2020.
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IRGC Maintains its Stranglehold on US Treasury Yields

Key Points

  • The IRGC warns shipping that alternative routes not mandated by Tehran were “unacceptable and completely dangerous.”
  • A cargo ship on an alternative route near the coast of Oman is struck by a projectile believed to be a drone.
  • US aircraft retaliated with an attack on Iran’s coastal radar and missile sites.
  • 10-year Treasury yields are falling in response to low oil prices.
  • However, Core PCE figures for May warn that inflation is spreading across the broader economy.
  • Gold rallied above primary support at $4,000 per ounce.

Iran’s Revolutionary Guards are tightening control over shipping passing through the Strait of Hormuz, forcing ships to follow their advised route or face the consequences.

From the Financial Times:

At least four tankers have been turned back by Iran while attempting to exit the Strait of Hormuz on Thursday, as Tehran appeared to challenge an evacuation route issued by the International Maritime Organization.

The IMO on Tuesday said that after “discussions with all parties” it had established a safe evacuation corridor hugging the Omani coast for ships and seafarers that had been stuck in the Gulf for more than 100 days.

But the Blue Star I, SG Pegasus, Azumasan and Omega Trader either made a U-turn or changed course from the IMO’s route on Thursday, according to ship tracking data. Analysts said the diversions were likely to have been made after instructions from Iran’s Islamic Revolutionary Guard Corps, which said routes not mandated by Tehran were “unacceptable and completely dangerous.”

That setback comes one day after 62 vessels managed to traverse the strait, according to data from Windward, the best single-day showing since hostilities commenced on Feb. 28.

Later, an IRGC drone attack was reported on a cargo ship traveling close to the coast of Oman.

LONDON/MAMANA/DUBAI, June 25 (Reuters) – The U.N. International Maritime Organization paused its operation to escort ships through the Strait of Hormuz on Thursday after a vessel reported an attack, reigniting concerns about ‌whether a preliminary deal to end the Iran war will hold.

The cargo ship said it was hit close to Oman by a projectile, British navy agency UKMTO said, hours after Tehran warned vessels against taking routes that it had not approved.

Two U.S. officials told Reuters that Iran had fired on the ship, while Iran’s Persian Gulf Strait Authority, which Tehran established to manage requests for ships to travel through the strait, said vessels outside routes it has set will ​not be guaranteed safe passage.

“Consequences arising from passage through unauthorized routes shall be the responsibility of the owner, operator, and vessel commander,” the Iranian authority said.

The US military retaliated with airstrikes on Friday:

WASHINGTON/DUBAI, June 26 (Reuters) – The U.S. military attacked Iran on Friday in response to an Iranian drone strike on a ‌cargo ship in the Strait of Hormuz, with each country accusing the other of violating terms of a ceasefire agreed on last week.

U.S. Central Command said aircraft struck missile and drone storage locations and coastal radar sites, and a U.S. official reported the operation had concluded. Iran said a projectile struck the area around a pier in Sirik in southern Iran, and that Iranian naval forces responded by striking U.S. military targets in the region.

Brent Crude futures (Aug’26) fell 2%, however, on news that Israel and Lebanon had signed an interim ceasefire agreement while terms of a broader agreement are negotiated.

Brent Crude Futures (ICE August'26)

JERUSALEM/BEIRUT/WASHINGTON, June 26 (Reuters) – Israel and Lebanon signed a framework agreement in Washington on Friday following several days of talks to secure an end to fighting between Israel and Iran-backed Hezbollah militants, though ‌both sides framed the deal as an initial step.

Lebanese Ambassador Nada Moawad and her Israeli counterpart Yechiel Leiter signed the trilateral document with the U.S. at the State Department in Washington, providing few details.

Israeli Prime Minister Benjamin Netanyahu said the agreement allows Israeli forces to continue to occupy southern Lebanon if Hezbollah does not disarm.

PCE Inflation

Headline PCE inflation jumped to 4.1% for the 12 months to May 2026, while the Core PCE index, excluding Food and Energy, rose to 3.4%. The rising Core index indicates that inflation is no longer affecting just energy-related items, but is spreading into the broader economy.

PCE & Core PCE

The monthly increase for May was even higher at annualized rates of 5.4% and 3.8% for Headline and Core PCE, respectively.

PCE & Core PCE Inflation - Monthly

PCE for Energy remained elevated at 4.03% for May, an annualized rate of 48%, but we expect it to decline in June.

PCE Energy Inflation

However, higher fuel prices are now baked into supply chain costs and will likely persist for the next 3 to 6 months before inflationary pressures ease. PCE for Services, excluding Energy and Housing, increased at an annualized rate of 6.3% in May, indicating that inflationary pressures are spreading across the broader economy.

PCE Services Inflation

The spread of inflation across the broader economy increases pressure on the Fed to raise interest rates to slow the economy and halt the spread.

Treasury & Financial Markets

10-year Treasury yields are falling sharply in response to lower oil prices, with expectations of lower inflation running ahead of the supply chain lag.

10-Year Treasury Yield

2-year Treasury yields also eased to 4.12% but remain well above the Fed funds target range of 3.5%-3.75%, with at least one 25-basis-point rate hike expected this year.

2-Year Treasury Yield (CNBC)

Bitcoin1 continues testing primary support at 60,000. A breach would signal another decline, signaling a hard shift in financial markets toward risk-off.

Bitcoin (BTC)

Stocks

The S&P 500 lost ground for the fourth week, while declining Trend index peaks indicate secondary selling pressure, warning of a correction to test 7000.

S&P 500

The Magnificent 7 mega-cap stocks are leading the sell-off, with the Roundhill Magnificent 7 ETF (MAGS) headed for a test of primary support at 55. One of the key signals of the final stage of a bull market is when former leading stocks no longer participate in the advance.

Roundhill Magnificent 7 ETF (MAGS)

Dollar & Gold

The US Dollar Index broke through resistance as the oil price fell, but is now retracing to test its new support level. Respect would signal an advance with a target of 104.

Dollar Index

Gold recovered above primary support at $4,000 per ounce, buoyed by Dollar weakness and declining Treasury yields, which reduce the opportunity cost of holding Gold and Silver.

Spot Gold

Silver has also retraced to test its former support level at $60 per ounce.

Spot Silver

The decline in the broad DJ-UBS Commodity Index since March 2026 coincides with the steep rise in 10-year US Treasury yields. Rising long-term interest rates increase the opportunity cost of holding non-yielding commodities and precious metals.

DJ-UBS Commodity Index

Conclusion

The uptrend in 10-year Treasury yields has reversed amid falling oil prices and will likely strengthen demand for commodities and precious metals, provided crude oil prices remain low.

Iran’s Revolutionary Guards are keeping tensions in the Strait of Hormuz simmering. Not enough to spark a major conflict with the US, but sufficient to keep shipping in the Strait of Hormuz under their control. The US continues to deplete its Strategic Petroleum Reserve to alleviate the supply shortage and keep prices low, but this makes it more vulnerable to further threats to restrict the flow of oil through the Strait.

President Trump would be happy for negotiations with Iran to be drawn out, provided that the Strait of Hormuz remains open to shipping in the interim. But the Iranians are aware that their leverage expires with the November midterm elections, and we can expect ongoing threats to close the Strait. The path of crude oil prices is therefore difficult to predict.

We expect a long-term secular uptrend in Gold and Commodities relative to the Dollar. This is based on CBO projections that federal debt (held by the public) relative to GDP will exceed its post-WWII high of 106% before 2030 and expand to 175% of GDP by 2056.

CBO Projections of Debt Held by the Public as a Percentage of GDP

Aside from default, the only solution to the debt spiral is to suppress interest rates and allow inflation to run hot, so that GDP expands faster than federal debt, as in the 1950s to 1970s.

However, the budget deficit is running at close to 6.0% of GDP, and will likely expand further as the US invests in critical supply chains and ramps up defense spending, so even suppressing interest rates is unlikely to be sufficient.

CBO Projected Federal Deficit as a Percentage of GDP

 

Acknowledgments

Notes

  1. Cryptocurrencies are the highest-risk asset class, and we analyze Bitcoin (BTC) solely to identify risk sentiment in financial markets. Our analysis is not a recommendation to buy or sell BTC, nor is it a commentary on the merits of cryptocurrency.
Posted on

PPI Shock But Optimism Over Rate Cut Grows

Key Points

  • The Producer Price Index (PPI) grew by 1.06% in May, for the second straight month, at an annualized rate of 12.7%.
  • Annual PPI growth rose to 6.4%.
  • Bank credit growing faster than real GDP reflects rising inflationary pressure.
  • Bitcoin continues to test support at 60,000, signaling risk-off across financial markets.
  • Stocks and Gold are rising as optimism over a peace deal grows.

The monthly Producer Price Index (PPI) grew 1.06% in May, matching the April figure, with an annualized rate of 12.7%.

Producer Price Index (PPI) - Monthly

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Posted on

Shift from Growth to Value

Key Points

  • The Dow jumped 1.7% to a new high above 51500, outstripping the S&P 500, which gained 0.4%.
  • The Russell 1000 shows a shift from Growth to Value.
  • Bitcoin is testing primary support at 62000, signaling a market shift to risk-off.

The Dow jumped 1.7% to a new high above 51500, boosted by a strong shift to value stocks in the blue-chip index. Rising Trend Index troughs confirm buying pressure.

Dow Jones Industrial Average

The S&P 500 lagged, with a 0.4% gain, though it remains in a strong uptrend.

S&P 500

The recent rally in Growth stocks (IWF) relative to Value stocks (IWD) in the Russell 1000 threatens to reverse with a break of the rising trendline.

Russell 1000 Large Cap Value ETF (IWD) vs. Russell 1000 Large Cap Growth ETF (IWF)

A shift from Growth to Value would reinforce the Bitcoin1 risk-off signal below. A breach of primary support at 62,000 would signal another decline, reflecting market attempts to shed risk assets.

Bitcoin (BTC)

The war with Iran has also upended the Treasury market, with the 2-year Treasury yield jumping above 3.6% at the beginning of March, ending the primary downtrend. The reversal signals no more rate cuts, with the rally now exceeding the Fed funds target range of 3.5% to 3.75% as expectations for rate hikes grow.

2-Year Treasury Yield

The economy is at full employment, with job openings exceeding unemployment for the first time in 12 months.

Job Openings

Inflation is rising, with CPI likely to follow Brent crude higher.

CPI & Brent Crude

It would be unreasonable to expect the new Fed Chair to push for rate hikes at his first meeting, but we are likely to see a switch to a tightening bias.

Conclusion

The Dow is gaining on the S&P 500 as financial markets shift to a risk-off stance.

Kevin Warsh will chair his first FOMC meeting on June 16-17. 2-year Treasury yields indicate the bond market does not expect further rate cuts. The FOMC will likely switch to a tightening bias to calm market fears of rising inflation.

Acknowledgments

Notes

  1. Cryptocurrencies are the highest-risk asset class, and we analyze Bitcoin (BTC) solely to identify risk sentiment in financial markets. Our analysis is not a recommendation to buy or sell BTC, nor is it a commentary on the merits of cryptocurrency.
Posted on

Bond Market Deja Vu from 2022

Key Points

  • Investors are dumping long-term government bonds, with the yield on 30-year Treasuries rising to 5.13%.
  • Sovereign bonds across the UK, the EU, and Japan are all affected by the sell-off.
  • The S&P 500 and the Dow retreated on Friday by 1.2% and 1.1%, respectively.
  • Gold and silver fell steeply.
  • Copper, Lithium, Critical Materials, and Uranium are also experiencing a sell-off.
  • President Trump hinted at another major strike on Iran, with his Sunday “The Clock is Ticking” post on Truth Social.
  • Brent futures jumped to above $111 per barrel early Monday.

Investors are dumping long-term government bonds. The 30-year Treasury yield broke resistance at 5.0%, rising to 5.13% on Friday before easing slightly to 5.12% early Monday.

30-Year Treasury Yield

High bond yields, above the rate of inflation, increase the risk of a solvency crisis where the borrower can’t meet its interest payments. Issuing new debt to cover interest payments accelerates debt growth, causing debt-to-GDP to spiral out of control.

UK Gilts 30-year yield jumped to 5.85%.

30-Year UK Gilts Yield

The French 30-year climbed to 4.67%.

30-Year UK Gilts Yield

Italian 30-year yields are at 4.75%.

30-Year UK Gilts Yield

France and Italy have higher debt-to-GDP ratios than the UK. The primary reason they enjoy lower yields is that their long-term yields are suppressed. The Bank of England, on the other hand, is shrinking its balance sheet to restore fiscal stability.

The yield on the 30-year German Bund is even lower because of Germany’s strong fiscal position, with much lower debt levels.

30-Year German Bund Yield

The Japanese 30-year yield is shooting upwards. JGB yields should be much higher because of Japan’s precarious debt-to-GDP ratio. However, the Bank of Japan buys government bonds (JGBs) to suppress the yield and avoid a solvency crisis.

Adding to the selloff on Monday was news that Japan’s government will likely issue fresh debt as part of funding for a planned extra budget to cushion the economic blow from the war, worsening already strained government finances. Yields on ​the 30-year Japanese government bond (JGB) jumped more than 10 bps to their highest on record at 4.200% while the 10-year yield touched its highest since October 1996 ​at 2.800%. (Reuters)

The yield on the 30-year JGB has since weakened slightly to 4.10%.

30-Year JGB Yield

The chart below, by Robin Brooks, compares long-term government bond yields (on the left axis) to countries’ debt-to-GDP ratios (on the bottom axis). Yields in Japan (JP), Greece (GR), and Italy (IT) are being suppressed, while yields in Australia (AU), New Zealand (NZ), and the UK (GB) are higher due to more conservative central bank policies.

JGB Yield & Debt-to-GDP Ratio

Why are Long-term Yields Rising?

There are several overlapping reasons why long-term yields are rising:

Increased defense spending expands government deficits and raises debt-to-GDP ratios, increasing the risk of fiscal dominance.

Fiscal dominance is where the central bank prioritizes bond market stability over currency stability, lowering interest rates while tolerating higher inflation, to prevent a solvency crisis in the bond market.

The US-Iran conflict has caused oil shortages, driving crude oil prices higher. High oil prices are fueling a steep rise in inflation, increasing the risk of capital erosion for bond investors.

The US Fed has entered into a $100 billion currency swap agreement with the United Arab Emirates. The facility will help the UAE to survive the loss of oil revenues while the Strait of Hormuz is closed. Further currency swaps with other Gulf States will likely follow. The currency swaps are effectively a medium-term loan from the Fed, but risk becoming a standing facility if the conflict in the Gulf is not quickly resolved. Their primary purpose is to avoid the Gulf States selling reserves to make up for lost oil revenue. The sell-off of hundreds of billions of US Treasuries would flood the market and drive up yields.

The AI boom has driven a massive surge in capital spending by mega-cap technology companies as they vie for market share in a rapidly expanding market. Much of the capital spending is funded through long-term debt issuance, leading to a steep increase in the supply of high-quality long-term debt.

US-Iran Conflict

President Donald Trump on Sunday again threatened Iran:

“For Iran, the Clock is Ticking, and they better get moving, FAST, or there won’t be anything left of them,” Trump said in a Truth Social post. “TIME IS OF THE ESSENCE!” (CNBC)

Trump’s post caused a sharp jump in Brent crude futures prices when the market opened on Monday.
Brent Crude Futures (ICE July'26)

Stocks & Financial Markets

The S&P 500 retreated below 7500, falling 1.2% on Friday.

S&P 500

The Dow similarly retreated below 50,000, falling 1.1%. A decline below support at 49,000 would signal a correction.

Dow Jones Industrial Average

Bitcoin1 retreated below support at 80,000, warning of further market risk aversion.

Bitcoin (BTC)

10-year Treasury yields jumped to 4.6%. The breakout above 4.5% offers a short-term target of 4.75%. Rising Trend Index troughs indicate strong upward pressure on long-term yields.

10-Year Treasury Yield

Dollar & Gold

A Dollar shortage is driving up the US Dollar Index as global markets struggle with crude oil shortages and rising prices, a fiscal crisis among Gulf States that have lost their primary source of revenue, and lower US trade deficits.

Dollar Index

The Dollar enjoyed similar strong demand after Russia invaded Ukraine in February 2022, followed by a steep fall in November, when energy markets had stabilized.

Dollar Index

Gold is testing support at 4500. A breach of 4400 would signal a test of 4000, but respect of support remains more likely.

Spot Gold

In 2022, Gold initially shot up after Russia’s 24 February invasion of Ukraine, but then declined for 6 months until energy markets stabilized and the Dollar weakened.

Spot Gold

Silver fell steeply last week and is headed for a test of support at 71.

Spot Silver

Energy

Brent crude continues its uptrend, and another test of resistance at $120 per barrel is likely.

Brent Crude

The Dow Jones Global Oil & Gas Index respected support at 580, headed for a test of resistance at 620. Trend Index troughs above zero signal buying pressure.

Dow Jones Global Oil & Gas Index

Uranium

Uranium is taking a beating, with the Sprott Uranium Miners ETF2 (URNM) breaking secondary support at 64. A breach of support at 58 would signal a primary downtrend.

Sprott Uranium Miners ETF (URNM)

Lithium

All strategic materials are under pressure, even Lithium, which has enjoyed strong demand from booming EV sales. Sprott Lithium Miners ETF2 (LITP) broke its new support level at 16.50. Follow through below 15 would signal a correction.

Sprott Lithium Miners ETF (LITP)

Critical Minerals

Critical materials show similar selling pressure, with Sprott Critical Materials ETF2 (SETM) testing support at 35.50, while a lower Trend Index peak warns of selling pressure.

Sprott Critical Materials ETF (SETM)

Copper

Copper retreated below 14,000 after a strong run-up.

Copper

Sprott Copper Miners ETF2 (COPP) reflects similar selling pressure, breaking initial support at 42, while a lower Trend Index peak signals selling pressure.

Sprott Copper Miners ETF (COPP)

Conclusion

We expect a similar playbook to 2022, after Russia’s full-scale invasion of Ukraine: rising energy prices, followed by rising long-term bond prices, and a stronger Dollar.

S&P 500

The S&P 500 suffered a 26% drawdown in 2022, and stock prices will likely weaken, though partly cushioned by the AI boom. We also expect weakness in Gold, Silver, and strategic materials like Uranium, Lithium, Critical Minerals, and Copper — until energy markets stabilize.

Acknowledgments

Notes

  1. Cryptocurrencies are the highest-risk asset class, and we analyze Bitcoin (BTC) solely to identify risk sentiment in financial markets. Our analysis is not a recommendation to buy or sell BTC, nor is it a commentary on the merits of cryptocurrency.
  2. We analyze exchange-traded funds (ETFs) to determine market sentiment towards a specific sector, industry, or commodity. The analysis is not a recommendation to buy or sell, nor is it a commentary on the merits of the particular ETF.
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