Bond yields continued to climb last week as the SPX continued to plateau.
Bonds usually aren’t as exciting as stocks so they tend not to make front-page news unless they do something surprising - like jump to yields not seen for decades. Here’s a very good article describing the situation.
The spike in Treasury yields isn’t being caused by rising inflation expectations. Anyone who thinks that the CPI-U will rise more than 2.3% over the next 10-30 years should be buying TIPS because the TIPS yield has been rock-steady at 2.3% over nominal Treasuries for many months. No, the rising yields are due to fundamental Macroeconomic trends like a solid economic outlook, competition for investor cash due to strong tech sector investment, as well as market participants adjusting prices to deal with the monetary policy outlook. The last part is the Fed’s new hawkishness due to Fed Chair Kevin Warsh’s serious intent to quell inflation.
The sweet spot on the Treasury yield curve is 2 to 10 years. The yields here have jumped for the past month. For investors who buy individual bonds and hold to maturity this is a rare buying opportunity to get a good return on cash. It can be treated as a paycheck - you know exactly how much will be coming in every month. Bond funds are not the same since yields could go up and a fund’s NAV could fall, losing principal.
Treasury Secretary Bessent has said that he plans to issue shorter-term T-bills to pay for the growing deficits. Investors expect a wave of supply without commensurate increased demand. That’s why prices are falling and yields are rising.
The junk bond spread is rising at the same time. Zombie companies that can barely make the interest payments on their maturing low-yield bonds from 2020-2021 will be stuck borrowing at higher interest rates. Some of these will pay their maturing debt with even more debt at higher yields. Others may go bankrupt.
Companies needing to borrow to build AI data centers and other business needs are paying higher interest rates.
The stock indexes have been treading water for the past month.
https://www.wsj.com/finance/stocks/how-to-know-when-the-ai-boom-is-about-to-go-bust-61af3d26?mod=hp_lead_pos3
How to Know When the AI Boom Is About to Go Bust
History shows that market manias end when the capital spigot turns off
By Jonathan Weil, The Wall Street Journal, Sept. 27, 2026
Almost from the start of the artificial-intelligence boom, a steady chorus of bears has warned that it’s destined to end in tears—like the original dot-com bubble more than a quarter-century ago and the housing bubble of the mid-2000s…
The list of things that could go wrong is long. There isn’t enough power for all the data centers under contract. There might not be enough paying customers to support all the data centers. The biggest AI-model developers could themselves be disrupted by upstarts. Rising interest rates could make borrowing costs prohibitive. And, most spectacularly, rogue AI agents might kill us all.
Yet new capital continues to pour into the AI trade and, as obvious as this point might be, that is where its biggest vulnerability lies.
Booms need continuous flows of fresh capital to perpetuate themselves. History shows they can start turning into busts the moment the window to raise new capital closes. Tipping points can happen suddenly, or as a slow-motion capitulation. But we’re not there yet.
Here is a signal to watch for in the meantime: See if the term “funding gap” returns to the market’s vernacular. Along with “burn rate,” funding gap became part of the financial lexicon in 2000, as the dot-com bubble was starting to deflate…
All anybody on the outside seems to know is AI companies are burning through lots of cash, with an insatiable need for more and no visible profits by conventional measures…[end quote]
From the tulip mania to the Dutch East India Company to the railroads to the internet fiber optic boom, every bubble in history deflated when new investors said, “Nope, doesn’t make sense to me at this price” and the cash that powered the bubble stopped.
The Chicago Fed’s National Financial Conditions Index (NFCI), which provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems, shows that money is still very loose.
Inflation is still above the Fed’s goal although multivariate core trend inflation is declining.
The Atlanta Fed’s GDP Now Estimate for 2026:Q3 is 5.0% - a roaring economic forecast that is largely based on AI capital spending and will be inflationary if real productivity doesn’t grow faster than its recent trend.
Oil, gasoline, diesel and natgas are all trending up. USD is climbing and bitcoin is clawing its way out of the basement.
The METAR for next week is cloudy. Bond yields will probably climb, extending the fall in prices. There’s no indication that the stock market will suddenly get excited - nor that the music will suddenly stop, either.
Wendy
