WEEK ENDING 8/14/2026
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- New streamlined “Week in Review” format
- US-Iran conflict and oil prices yo-yo
- Treasury auction results
- New inflation reads
- Inside information for sale, come and get it!
A CITY DIFFERENT TAKE
The U.S.-Iran conflict still leads the economic headlines while traffic through the Strait of Hormuz slows.
“Transit through the Strait of Hormuz appeared to grind to a near standstill on Friday after two more ships were attacked there and the United States said it could maintain a naval blockade of Iran indefinitely.” Yo-yo conflict
It appears that the United States has limited military options in this continuing conflict due to munitions shortages:
“A Center for Strategic and International Study analysis of air defense systems found that Patriot stockpiles have been depleted by two-thirds and the THAAD missile inventory, which it estimated was 452 before the start of the war, has been reduced by half.” What about sticks and rocks?
WTI oil futures finished the week at $82.40 per barrel, up from last Friday’s close of $78.18 per barrel (a 5.4% weekly increase).
Two inflation reports were released last week: CPI and PPI. Year-over-year core CPI was 2.5%, right on expectations as reported by Bloomberg. This number was also right on top of the long-term average of 2.43% as calculated by City Different Investment (CDI) going back to June 1994 with a z-score (number of standard deviations off the mean) of 0.07. Regardless, the inflation read is well above the Fed’s 2.00% target.
One of Chair Warsh’s “task forces” certainly will determine what inflation measure should be used and what the target should be. Questions like this only add to the uncertainty surrounding the new Fed chair and Fed operations. The fixed-income markets may get more clarity coming out of the Fed’s Jackson Hole Symposium (Aug. 27-29). Hope springs eternal but we remain skeptical.
PPI releases followed. Year-over-year core PPI was 4.2%, down from last month’s 4.7% but still above the long-term average calculated by CDI of 2.07% (between June 30, 1994, and July 31, 2026). For those keeping score, that is a z-score of 1.33.
The Treasury auctioned $125 billion in total debt this week: $58 billion in 3-year notes, $42 billion in 10-year notes, and $25 billion in 30-year bonds. The results illustrate the market’s uneasiness with the perceived increase in uncertainty.
“The bond sale comes on the heels of a $40 billion auction for 10-year notes on Wednesday, which were sold at the highest since 2007.
“A $25billion Treasury auction of 30-year bonds on Thursday drew yields as high as 5.22 per cent, according to the U.S. Treasury department. It marked the highest yield since the 5.52 per cent paid in August 2001, after which 30-year auctions were suspended for almost five years.
“The jolt higher in borrowing costs comes as the US debt pile has swollen to almost $40 trillion, pushing the debt-to-GDP ratio towards an all-time high. Meanwhile, Trump’s war with Iran has sent prices for consumers and businesses sharply higher, raising the bar for investors to scoop up bonds that will provide consistent interest rates for the next three decades.”
Some of the reasons for these results are:
“The jolt higher in borrowing costs comes as the U.S. debt pile has swollen to almost $40 trillion, pushing the debt-to-GDP ratio towards an all-time high. Meanwhile, Trump’s war with Iran has sent prices for consumers and businesses sharply higher, raising the bar for investors to scoop up bonds that will provide consistent interest rates for the next three decades.” The price of profligacy
THE TREASURY MARKET: ADD CASH FLOWS
Treasury rates were down a little in 1-year maturities (-0.03 to 3.98%) and a little higher in longer maturities (+0.01% to +0.06%). The Treasury yield curve steepened consequently; the 2-10 spread went from 0.46% to 0.51%. The market implied probability of a 0.25% Fed increase in short-term rates closed Friday at 31.8%. (It was 44.0% the week prior.) A 5-year Treasury security yield about 93% of the yield of a 10-year Treasury security, about 0.78 standard deviations off the long-term average as calculated by CDI. Credit Spreads in the taxable market were largely unchanged on the week, ending at 0.97% for BBB credit versus AAA credits.
THE MUNICIPAL MARKET
Interest rates in the municipal market were largely unchanged for the week. The 2-10-year maturity spread ended the week at 0.71%, or one standard deviation off the long-term average. A 5-year AAA municipal bond yields about 87% of the yield of a 10-year AAA municipal bond, about 0.93 standard deviations off the long-term average as calculated by CDI. Municipal bonds are still on the rich side, yielding anywhere from 60.5% to 68% of the yield of their Treasury equivalents in 1-, 5-, and 10-year maturities. Longer municipal bonds look cheaper versus their Treasury equivalents; in 30 years, that ratio is 83.62%. 10-year BBB versus AAA credit spreads finished the week at 0.90%, well below their long-term average of 1.67%. Total supply of new-issue municipal bonds is expected to be $15.4 billion. The municipal bond market has been holding up very well despite uncharacteristically high new issuance of municipal bonds.
THE CORPORATE MARKET
Corporate bond yields were largely unchanged on the week.
THIS WEEK IN WASHINGTON
Here are a few of the major headlines coming out of Washington this week:
1. Kennedy Center Renovation and Naming Vote
- Vandalism vs. Contractor Blame
- Trump Administration Asks Supreme Court to Allow Ballroom Construction
- The board voted to close the main building for two years.
- Members voted to place President Trump's name on the facility entry.
- The move tests previous judicial blocks on earlier shutdown attempts. Try, try again
2. Vandalism vs. Contractor Blame
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Legal Shift: The Justice Department dropped charges against former Olympian David Hearn, stating that a rushed installation by contractors caused the liner to tear and peel. Vandals, what vandals?
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Administration Disagreement: President Trump and Interior Secretary Doug Burgum publicly rejected the U.S. Attorney's findings, continuing to insist that vandals caused the major damage. Try again
3. Trump Administration Asks Supreme Court to Allow Ballroom Construction
- The Trump administration filed an emergency appeal asking the Supreme Court to allow construction to continue on a planned White House ballroom.
None of these items seem to be as important as the trouble with the USS Abraham Lincoln.
“Several lawmakers say they are concerned about reports of a lack of food and personal supplies aboard the carrier, as well as plumbing backups, as the carrier’s deployment stretches into its ninth month.
“The Lincoln has been deployed for more than 250 days and it hasn’t made a port call in 200 days, setting a record for consecutive days at sea, according to Sen. Richard Blumenthal (D., Conn.), who wrote a letter to Defense Secretary Pete Hegseth and acting Secretary of the Navy Hung Cao.”
The Navy has decided to take corrective action:
“The U.S. military is preparing to replace the USS Abraham Lincoln with the USS George Washington as part of a scheduled Middle East deployment, U.S. officials said, amid growing concerns over living conditions aboard the Lincoln and the strain on troops during the Iran war.”
This could take a month. Logistics like inventory maintenance are hard.
Secretary of Defense Hegseth’s reaction to these reports:
“Hegseth said concerns about the Lincoln have been ‘completely misrepresented’ while speaking with reporters aboard a Navy ship in Panama City, Panama, on Thursday.” Navy troubles (echoes of the Bounty)
The president seems to share Mr. Hegseth’s opinion:
“President Trump played down concerns about the living conditions aboard the USS Abraham Lincoln, an aircraft carrier that has been deployed for more than 250 days, and suggested the lengthy naval deployment in the Middle East was ‘not nearly long enough.’” Another Mr. Bligh wannabe
We wondered what George Washington would have thought of this:
“George Washington is said to have claimed that ‘a nation is judged by how well it treats its veterans.’ Well, it has been a rough month for veterans in America.” Aye, Aye, Mr. Bligh
Is insider information for sale in Washington?
“Two media organizations sued President Trump on Wednesday over his social media platform Truth Social's new service offering faster access to his often market-moving posts, calling it ‘extraordinary, corrupt, and unconstitutional.’” Social posts, get your social posts here! Only $100,000 a month!
If you don’t think this is a problem, just read Michael Lewis’s book “Flash Boys: A Wall Street Revolt” to help you decide.
Here is an interesting aside:
“Sen. Mark Kelly (D-Ariz.) blasted President Trump on Thursday for ordering the U.S. Navy to revert to older catapult systems on its aircraft carriers, arguing the change would be costly while questioning Trump’s qualifications to make such a call.
“‘He’s a marginally failed real estate developer with multiple bankruptcies,’ Kelly said in an interview with MS NOW. ‘He shouldn’t be weighing in on systems, on aircraft carriers.’
“The Arizona Democrat has said that despite his own experience in hundreds of career takeoffs and landings, his degree in aeronautical and marine engineering and his work as a test pilot, he still would not tell Navy engineers how to design a carrier.” He has not yet begun to fight
CONCLUSION
There is a term in the military to describe the U.S. conflict with Iran: FUBAR. (We will not define this term any further; compliance may not let this reference go through). The fixed-income market was pretty quiet given the inflation releases. The yield curve steepened. This could mean that the market is sensing increased uncertainty and is demanding a higher risk premium to attract investors.
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