What's Next For Long Rates?
1.) SPREADS - I've discussed in the past that this cycle is going to be a lot about credit and whether or not the worst of the credit market borrowers (like the CCC rated debt) stays contained. Credit spreads are simply the difference in interest rates on junk debt to US Treasuries. So far, those credit spreads have been widening really only on that super crappy CCC debt. You might remember that by comparison this segment of the junk market is really, really small. You can re-read my post on that here. I would call the Single B debt as just mildly widening...nothing serious. This just shows that the credit stress still remains mostly concentrated in the lowest-quality (CCC & lower) segment.
2.) RATES - Last week I commented that if the 30YR yield broke 5.36% and held it would likely have moved into a downward bias, or bearish regime. Often when that happens, a counter trend bounce occurs. It looks like we might now be at that stage with the 30YR signaling oversold and the vol signal high and rolling over while flashing a buy signal. Where is the bounce likely to take us? Up to where it broke trend at the 5.36% range (bottom of that shaded area). We have the Fed tomorrow, so if there ever was a catalyst to move rates up, that would be it. We're 4 days below trend now, so the burden of proof is squarely on the bear's shoulders. Will they regain control? We'll know tomorrow.
3.) INFLATION - Of course the one thing that could break this new downward bias in long rates is inflation. What's it doing? Accelerating. That's nothing new. And an acceleration in inflation is not a market breaker. A market breaker is when both growth and inflation flip to a deceleration, and so far that hasn't happened. The Atlanta Fed is forecasting GDP at 3.5%. We'll get another update to that forecast later today. Importantly, the 3.5% Atlanta Fed GDPNow nowcast for Q3 2026 real GDP growth (SAAR) represents an acceleration on a quarter-over-quarter basis relative to the official prior quarters. The 3.5% is higher than both the 2.2% in Q2 and the 2.5% in Q1, so it indicates a rate of change acceleration. Markets tend to be ok with that macro set up - accelerations.
