This was a busy week filled with new numbers on inflation, consumer confidence, policy steps or missteps depending on your worldview, and an important speech closing out the week. But first the numbers.
The Conference Board released its consumer confidence numbers last week, 89.4. It’s the lowest reading since January 2026, but still within the fair range as calculated by CDI since April 2005. The current reading is very close to the long-term average of 92.83, only 0.029 standard deviations lower. Next came the Personal Consumption Expenditures release. Chair Warsh referred to PCE and the matrix he follows, so long Core PCE? Headline PCE was 3.7%, and Core PCE was 3.3%, both well above the 2.00% target the Fed has been using and now endorsed by Chair Warsh. Based on Friday’s close, which put the real yield of a ten-year Treasury security 1.42% below the long-term average of 1.84% (or -0.25 standard deviations lower than the mean going back to June of 1994). For a ten-year AAA general obligation municipal bond at +0.01%, well below the long-term average of +1.24% (or -0.246 standard deviations lower than the long-term average).
The Treasury announced that it was doubling its $2 (B) long-dated bond buyback program. When the program was initially announced, long Treasury bonds rallied (for the day) before giving back all their daily gains. Stanley Druckenmiller penned an editorial in the Wall Street Journal in which he critiqued the program. “Let the Bond Market Speak,”
Government intervention such as this or the earlier Yen intervention rarely works in the long term.
These actions are focused on maintaining or lowering US interest rates. This seems to us to be window dressing before the mid-term elections. Perhaps the Republican Party senses a tough fight ahead.
It looks like we are entering a trade war with Canada. The Wall Street Journal, in an opinion piece, called this, “The Dumbest Trade War Revisited”
Finally, Chair Warsh’s Jackson Hole Speech. He came out looking quite hawkish on fighting inflation; we will see at the next Fed meeting (9/16/2026). The fixed income market is currently implying a 58.3% probability of a 0.25% increase in the Fed Funds rate. The implied probability was 39.9% at the end of the prior week. Mr. Warsh indicated his support for PCE, and the inflation measure du jour. He was not clear if this is the headline reading or the core reading (maybe he eats and drives 😊). He further indicated that he thought the economy was doing fine and that it had an inflation problem. He was light on addressing whether wages were keeping up with inflation. He did refer to money being important, bringing back M2 money supply, which, if you haven’t been watching it, is looking problematic. M2 is running over its long-term average growth rate. In July, M2 increased by 2.39%. M2 is growing, and its velocity is increasing as well (not supportive of the Fed's price stability mandate).
One of the drivers of the economy has been the capex spend on AI infrastructure. Barron’s had an interesting article on this, stating:
“Capital spending bubbles almost always pop, but rarely when investors suspect they will. That has been the case for much of U.S. history, starting with the railroad buildout, through the dot-com boom, and beyond. While the AI capex explosion is almost certainly going to end badly, the chances of it ending badly now are low. Over America’s 250-year history, the economy has absorbed spending on transformation technology equivalent to about 25% of economic output before things get really hairy, according to a Barron’s analysis. Artificial intelligence isn’t there yet, and won’t be for years, suggesting that the AI trade—and the stock market rally—has more room to run.”
As long as companies were paying for AI out of free cash flow, no one seemed to mind. But now, the cash-flow machines of old— Amazon.com, Alphabet, Meta Platforms, and Microsoft, among others—are going into hock to pay for their AI data centers, and the worries are growing. And for good reason. The amount they aim to spend is staggering —some $2 trillion over the next two years—and concerns are starting to show up in debt markets, where the cost to insure against a credit default has skyrocketed.’ More Good News?
The article is interesting from an historical perspective, but it doesn’t address the buildout-added risk factor of circular financing. The picture below is an earlier illustration of this factor from an October 2025 article, “Nvidia, Microsoft, and Open AI’s Circular Financing”
THE TREASURY MARKET
Shorter maturity Treasury rates were up significantly on the week, 1-year maturities (+0.12% to 4.15%), and longer maturities were a little more muted (+0.05% to -0.05%). Treasury yield curve flattened; consequently, the 2-10 spread went from 0.50% to 0.39%. The market-implied probability of a 0.25% Fed rate increase closed Friday at 58.3%; it was 39.9% the prior week. A 5-year Treasury security yields about 95% of the yield of a 10-year Treasury security, about 0.88 standard deviations off the long-term average as calculated by CDI. Credit spreads in the taxable market were lower on the week, ending the week at 0.89% for BBB credit versus AAA credits.
THE MUNICIPAL MARKET
Interest rates in the municipal market were largely unchanged for the week. The 1-Year, 5-Year, 10-Year, and 30-Year yields ended the week (-0.02%, 0.00%, 0.01%, 0.03%). The 2–10-year maturity spread ended the week at 0.39%. A 5-year AAA municipal bond yields about 86% of the yield of a 10-year AAA municipal bond, about 0.87 standard deviations off the long-term average as calculated by CDI. Municipal bonds are still on the rich side of fair; they yield anywhere from 60.3% to 69.6% of the yield of their Treasury equivalents in 1, 5, and 10-year maturities. Our longer municipal bonds look cheaper versus their Treasury equivalents; in 30 years, that ratio is 86.9%. Ten-year BBB versus AAA credit spreads finished the week at 0.83%, well below their long-term average of 1.67%. The total supply of new-issue municipal bonds is expected to be $13 (B). 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 higher for maturities shorter than 5 years, and slightly higher for longer maturities.
THIS WEEK IN WASHINGTON
We have a new trade war with Canada, but why are they such nice and polite people? I guess that is true unless you attack their sovereignty.
Jared Kushner met with Hakeem Jeffries; it seems a little late to play nice. Is this more evidence that the administration is a little worried about the mid-term elections? This dovetails nicely with the government’s manipulation of the bond market.
The summer is ending, the kids are going back to school, and the midterms are upon us. We expect volatility to increase as we go into the fall. Each week brings an exciting new revelation.
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.
A description of the indices mentioned herein is available upon request.