WEEK ENDING 9/11/2026
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- FOMC meets this week, and the market is pricing a hike
- Secretary Bessent between a rock and a hard place
- Old economy (oil) and new economy (AI); both are creating future uncertainty
A CITY DIFFERENT TAKE
The August Consumer Price Index came in at 3.4% year over year. Core CPI surprised the market, coming in 0.1 percentage point higher at 0.290% month over month. While this seems like a small miss, the market has interpreted it as pushing the probability of a September rate hike to 90% from 70%.
The Federal Reserve meets this week on Sept. 15-16. The hike has been solidified by the CPI numbers and by Warsh’s own speech at Jackson Hole, where he said the central bank had ‘work to do’ to bring inflation down to 2%. Another 25-basis-point hike is priced for December.
In some ways the market is now pushing the Fed chair to raise rates. It is the Chair’s credibility that is being tested here more than the breadth of inflation.
THE TREASURY MARKET
A rate hike will be expensive for the Treasury market. One that Secretary Bessent would not be happy about. We have $6 trillion of T-bills maturing this year. We spend about $15 billion annually on debt service. A rate increase will make life harder for the Treasury Secretary, both in short-term debt servicing and on the long end. The Secretary has been working diligently on brining down the long end. Last week, he announced a plan to repurchase $6 billion in bonds through longer-dated buybacks. This unorthodox combination of an expanded buyback program and yen intervention has not prompted the market to respond as the Secretary would hope.
The market is calling his bluff that he is the house for now.
Despite this, the whole curve steepened last week. The 2-year moved by 26 basis points on the heels of a possible rate hike by the Fed, driven by the CPI story. The long end also moved up by 12 basis points, anchored by the term premium and long-run inflation expectations.
Even though the front end of the curve is reflecting market expectations. The overall curve has flattened, with 2s10s at 35 basis points versus 21 basis points last week. The 2s 30s also flattened sharply, down 14 basis points from last week to 73 basis points.
Value metrics for us remain firmly anchored in the front end of the curve.
THE MUNICIPAL MARKET
The municipal curve backed up across the curve with the belly 10 years selling off the most. The 10-year AAA curve saw a notable sell-off of 23 basis points. Here, the story was a bit different from the Treasury curve. The 2s10s steepened to 91 basis points from 88 last week, while the 2s30s remained unchanged.
The muni treasury ratios also rose modestly across all tenors, with 2 years at 60% of Treasury, 10 years at 74%, and 20 years at 87%. You can see the story of the belly of the muni curve steepening and finally the 30 year at 90%.
THE CORPORATE MARKET
IG yields rose across the board for last week, but mostly unevenly. Bigger changes were seen in the 1-5-year part of the curve, which is sensitive to the Treasury curve.
THIS WEEK IN WASHINGTON
At this point, the old-economy oil and the new-economy AI are both culprits behind volatility. Let's talk about oil first.
The Saudi pipeline used to bypass the Strait of Hormuz has been hit and shut down. This confirms that any workaround for Hormuz will be expensive and time-consuming, requiring the construction of new infrastructure. According to Oman’s foreign minster a planned meeting between Iran and several gulf states has been postponed. The idea for the meeting was to create a temporary shipping lane through the Strait of Hormuz.
Diesel prices are currently at an all-time high. Our refineries are running at max capacity and deferring maintenance. The Strategic Petroleum Reserve is roughly drawn down by 125 million barrels since the war started.
Now moving on to AI. Last week, safety concerns resurfaced. All AI executives are now united in calling for a slow down in technology development. Anthropic’s CEO, Dario Amodei, posted a blog on Saturday asking the industry to slow down and calling for global coordination with regard to regulation. He was immediately supported by the billionaire CEOs of OpenAI and xAI Corp.
Investors, for their part, are more concerned along monetary lines about whether the AI boom will pay off in the near term.
CONCLUSION
Last week was a hawkish inflation story for the market. It was a rates story. The Fed chair, while devoted to 2% inflation, might be pressured by the market to deliver a 25-basis-point rate hike this week to prove his credibility. Both Treasury and IG markets repriced substantially in the front end. At the same time, the Muni curve chose the 10-year spot.
If Kevin Warsh raises the rate this week, he will disappoint not only the President but also the Treasury Secretary. Meanwhile, we are still struggling with oil and diesel prices and with whether there is an alternative to the Strait of Hormuz.
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