---
title: Bonds, Bubbles & Buybacks
description: An in-depth review of the recent economic trends and potential challenges ahead. Explore the steepening Treasury curve, inflation concerns, municipal bond market dynamics, and the impact of political events on the economy. Gain valuable insights into what could go wrong and how it may affect your investments. Stay informed with City Different Investments.
---

[City Different Investments Blog](https://blog.citydifferentinvestments.com)

# [Bonds, Bubbles & Buybacks](https://blog.citydifferentinvestments.com/bonds-bubbles-buybacks)

 Written by [City Different Investments](https://blog.citydifferentinvestments.com/author/city-different-investments) | Sep 28, 2026, 4:23:16 PM

## WEEK ENDING 9/25/2026

- - What's behind the rate rally in the bond market?
    - Is the Treasury curve signaling an impending curve inversion?
    - Is Oracle showcasing a capex payback issue?

## A CITY DIFFERENT TAKE

Bond yields have been climbing. The front end is set by the Federal Reserve, and inflation fears have risen. Currently, the effective federal funds rate is 3.88%. The three numbers driving this are Core PCE (a measure of inflation) at 3.4% (on the high side), unemployment at 4.1% (well balanced), and real GDP at 2.3%. The current probability of a 25-basis-point rate hike in October is 64%, and for December is 78%.

Let’s explore the reasons for a rate hike. Indomitable US growth is coming from the AI capital spending boom. The green pastures are promising high productivity and faster growth. Despite fears that AI will lead to job losses, we are seeing strong hiring and a robust labor force, which is also reflected in earnings growth for corporate America. The second reason is something the US Treasury is uncomfortable with. The US federal debt has surpassed $20 trillion, or more than 120% of GDP, and the cost of servicing this debt is currently pinching the Treasury.

This has led the Treasury to step in and change buy-back plans. AI hyperscalers have been issuing debt at a record level and competing with the US Treasury for the same investor base. The market is demanding higher yields due to greater supply (AI) and greater uncertainty (Treasury).

AI spending has proven insensitive to higher rates. AI has been the growth story for America, with GDP now forecast to grow 5.1% in Q3 2026. On the other side of this trade is Washington. Even with midterms so close, we are not hearing about austerity, tax increases, or spending cuts from either party. Kicking the can down the road is becoming expensive, just ask Treasury Secretary Bessent.

A series of rate hikes might be in the cards, shifting the worry from inflation to growth. This is evidenced by the flattening of the curve in Treasury markets and spread products. As the Fed tightens into a strong economy now, the question is, does this flat yield curve lead to a curve inversion, even though the curve inversion has preceded the last eight recessions? We think it's an imperfect signal. Reminder: the last time the yield curve inverted was in late October 2022, and it remained inverted until 2024. We think that the flat yield curve is more of a Fed policy risk rather than a recession forecast.

 THE TREASURY MARKET

Last week, the long end of the curve, specifically the 30-year, rallied the most in yield terms, rising by almost 21 basis points, with the 30-year Treasury ending at 5.95%. The 10-year is now at 5.16%. The 2s10s slope moved to 31 basis points. On Thursday, the Treasury bought back $4.078 billion of 20- and 30-year bonds, below the $6 billion it had planned. Investors broadly see Bessent's effort to cap long-term yields through buybacks as having had a limited impact.

 THE MUNICIPAL MARKET

Munis had a much worse week than Treasuries, with the damage concentrated in the front end. The 2-year increased by 42 basis points to 3.47%, and the 5-year increased by 37 basis points; as a result, the muni curve flattened. The muni 2s10s curve is currently at 60 basis points.

This was reflected in the cheapening of munis relative to Treasuries, with the ratios for the short term in the 70% range.

 

 THE CORPORATE MARKET

Corporate bond yields moved higher in the week, largely shadowing the rate changes in the Treasury market. With spreads so tight, nearly all of the credit's price volatility now stems from movements in Treasuries. Last week's investment-grade losses were driven more by rates than credit, as corporates steepened alongside Treasuries. The long end took the biggest hit from the term premium and supply. Hyperscaler bond sales to fund the AI buildout have created a supply-and-demand imbalance that is being corrected through price adjustments, where we expect about $400 billion in hyperscaler and data center financing in 2026. That is up from $160 billion in 2025 and $44 billion in 2024. Bonds from these issuers have underperformed the broader credit market, reflecting heavy supply and concerns about negative cash flow.

**Note on Credit**

Oracle's credit hit a new low point last week and is dragging AI credit sentiment with it. On Thursday, September 24, the cost of insuring Oracle's debt through credit default swaps (CDS) spiked to record highs, alongside a surge in its borrowing costs. That was the same day the 10-year Treasury touched 5.22%. By Friday, CDS had widened for other hyperscalers and major tech names as well, including Alphabet, Microsoft, Amazon, Meta, Nvidia, and SpaceX. Last week, Oracle sent a force majeure notice to the developer of Project Jupiter, a Stargate AI data center campus in New Mexico. Oracle is not walking away as the main tenant. The notice allows it to delay payments if the facility misses its 2028 target for coming online. This has raised a concern about whether the capex in AI will pay back. On the other hand, in this case, Oracle is facing a power-permitting delay rather than a demand collapse.

 THIS WEEK IN WASHINGTON

Iran is refusing to allow shipping while US sanctions remain in effect. Meanwhile, the US has rejected Iran’s offer of a seven-day plan to reopen the Strait. As a result, the status quo of an economic squeeze on Iran and energy prices continues. So oil continues to be a key driver because of geopolitical volatility, as it factors into inflation and thus the Fed’s monetary policy.

In other Washington news, President Trump and Xi met at a three-day summit and renamed Artificial Intelligence as Super Intelligence. Not much of consequence came out in the press. China put out a presser that the ‘US would adhere to the correct position of opposing Taiwan independence’. Meanwhile, the administration’s stand on Taiwan is unclear and yo-yos between ‘strong support ‘and ‘heavy pressure’.

 

## CONCLUSION

The bond market continues to dominate the financial markets, with short-term rates rising significantly and the curve flattening. The flattening is suggesting that investors are nervous about the Fed stymying growth. Meanwhile, debt service costs for the US government continue to escalate, inflation remains volatile due to diesel and gas, and there is no peace deal on the horizon.

 

IMPORTANT DISCLOSURES  
*The information and statistics contained in this report have been obtained from sources we believe to be reliable but cannot be guaranteed. Any projections, market outlooks or estimates presented herein are forward-looking statements and are based upon certain assumptions. Other events that were not taken into account may occur and may significantly affect the returns or performance of these investments. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice.*

*Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly herein will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.*

*All indexes are unmanaged, and you cannot invest directly in an index. Index returns do not include fees or expenses. Actual portfolio returns may vary due to the timing of portfolio inception and/or investor-imposed restrictions or guidelines. Actual investor portfolio returns would be reduced by any applicable investment advisory fees and other expenses incurred in the management of an advisory account.*

*You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from City Different Investments. To the extent that a reader has any questions regarding the applicability above to his/her individual situation or any specific issue discussed, he/she is encouraged to consult with the professional advisor of his/her choosing. City Different Investments is neither a law firm nor a certified public accounting firm and no portion of this content should be construed as legal or accounting advice.*

*A copy of City Different Investments' current written disclosure statement discussing our advisory services and fees is available for review upon request.*

*Unless otherwise noted, City Different Investments is the source of information presented herein.*

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