Inflation and the bond market

Yesterday's CPI print didn't calm anything down — it just raised the stakes for next week's Fed meeting. Core inflation came in roughly in line with forecasts but ticked lower, yet that wasn't enough to shake the market's growing conviction that the Fed hikes rather than holds. Odds of a hike at the September 15-16 meeting jumped to around 91% this week, a striking reversal from the "will they cut" conversation that's dominated headlines for years. The 10-year Treasury yield is sitting near 4.97%, up over 18bps on the week, and the 30-year briefly touched its highest level since 2007. All of this is landing just days after Treasury Secretary Scott Bessent told a room at SMU, "I am the house now," daring traders to bet against him on both the yen and, by extension, U.S. rates.The bond market's answer so far: challenge accepted. Yields kept climbing even after Treasury announced a long-end buyback, which landed smaller than traders expected. The people effectively "betting against" Bessent aren't is the broad universe of bond investors pushing the long end higher, with voices like Stanley Druckenmiller (Bessent's old boss) publicly arguing that the 30-year yield is the last real fiscal disciplinarian left, and that suppressing it artificially just subsidizes more borrowing. If that wasn’t enough, the corporate bond market is starting to show signs of stress, particularly in the AI sub-sector. Spreads have widened substantially vs similar rated bonds (see chart below), despite AI being the stepping stone of this administration to grow out of debt. Meanwhile, Fed Chair Kevin Warsh, has taken the opposite approach from Bessent, pulling back forward guidance to let the bond market's message be heard rather than talking over it. This week we’ll hear from him again at the end of the FOMC meeting. Can he raise rates?

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