WEEK ENDING 8/21/2026
-
- Reading the Fed minutes
- Treasury’s mysterious intervention
- Warsh’s Jackson Hole speech
A CITY DIFFERENT TAKE
We parsed through the Federal Reserve Open Market Committee minutes for July. The key takeaway is that the committee is genuinely split. Nine of the twelve voters opposed a July hike. However, many participants favored a hike or tightening if inflation did not fall. Inflation has been coming down this summer, though it has been marked by volatility in gas prices. Reading the tea leaves in the minutes, this would squarely put us in hold territory again for the month of September.
The other take is Fed Chair Kevin Warsh’s “no forward guidance” approach. His intention is to give the committee more room to make a data-driven decision. This makes the August inflation print very important. Currently, there is a 36% probability of a rate hike for September.
The bigger story last week, though, was Sec. Scott Bessant and the Treasury. At the beginning of August, we saw the 30-year U.S. Treasury yield at 5.30%. This is the highest it has been in the last 19 years. The culprit is the heavy issuance of long-dated debt by the Treasury and high oil prices. The market remains uneasy about a Fed under Warsh that has offered no forward guidance on how it will address inflation. Inflation that's been above target for five-plus years.
Enter Sec. Bessent on horseback, who wants to tame high Treasury rates. Bessent has responded by expanding long-end buyback operations (from $2 billion to at least $4 billion per operation) and signaling upcoming “fiscal consolidation” measures.
But the market is in no mood to believe him. Markets shrugged this off quickly, since the increase wasn't large enough to meaningfully move yields, and it isn't actual money creation (not QE), just debt reshuffling. Much ado about nothing.
The 30-year U.S. Treasury yield is 5.27%. The last time the 30-year yield was close to 6% was in 1997 during the Clinton presidency, with surpluses and Alan Greenspan as the Fed chair. Interestingly, the problem then was different; the Fed chair warned of a potential shortage of Treasury securities. There's an important distinction from the last comparable yield environment: in 1997, when 30-year yields were near 6%, GDP growth exceeded 6%, and debt stood at roughly half its current share of the economy.
The market, or at least the Treasury, wants Chair Warsh to say something assuring to the bond market. We don't expect Warsh's Jackson Hole remarks to move markets much. He's been consistent in avoiding forward guidance, and we doubt his internal task forces have concrete conclusions ready to share yet (though we might get some guidance on balance sheet reduction).
THE TREASURY MARKET
The front end of the curve rallied; but long-end yields remained elevated and were slightly higher this week. The 2-10-year slope ended the week at 55 basis points.
THE MUNICIPAL MARKET
The muni market has been robust. For the full month of August, we are potentially looking at close to $60 billion in issuance. Next week, we are looking at $12 billion in new issuance. Last week, municipal AAA yields rose across all tenors. The longer end was hit harder. The 2-10-year slope steepened to 80 basis points.
THE CORPORATE MARKET
Corporate bond yields moved marginally lower over the week for investment-grade credit. The 2-10-year slope of the curve is 105 basis points.
THIS WEEK IN WASHINGTON
The market is finally waking up to the fact that our underlying national debt is $40 trillion. The Congressional Budget Office projected a $2.1 trillion deficit this year. Our annual interest is $1 trillion. This exceeds Medicare spending and is now five times the 2010 share of the budget. Independent economists broadly agree some combination of tax increases and entitlement reform is ultimately unavoidable, but with Social Security's trust fund facing depletion in 2032 and Congress showing little appetite for action beyond public statements, the most probable near-term outcome is not a default, but a gradual and sustained rise in borrowing costs and the cost of living more broadly.
US-Canada trade talks collapsed late Friday after the written deal repeatedly diverged from what Canada believed it had agreed to, triggering a 50% U.S. tariff on roughly $20 billion in Canadian goods. Ambassador Mark Wiseman said no single issue caused the breakdown; rather, it was a consistent pattern of the most negative possible interpretations appearing in the documents.
CONCLUSION
A $40 trillion debt load, a $2.1 trillion deficit, and $1 trillion in annual interest costs are forcing the bond market to do the discipline that Congress has so far avoided. Additionally, we have a Federal Reserve that seems genuinely split and a Treasury Secretary who is working to bring down long-end yields.
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.