The Economy Gets an Upgrade. Bonds Get the Bill.
For the week ended 10/3/26.
Welcome to the fourth quarter! The economy received an upgrade last week. Bond investors would probably settle for a refund.
Second-quarter GDP growth was revised from 1.5% to 2.2%, while first-quarter growth now stands at 2.1%. That paints a steadier picture of economic expansion despite higher borrowing costs, tariffs and expensive energy.
The American consumer continues doing the heavy lifting. Spending jumped 0.9% in August, although income increased just 0.2%. Enthusiasm at the checkout counter is encouraging; spending persistently faster than income is harder to sustain. Meanwhile, annual PCE inflation held at 3.4%. Stable, yes. Comfortable for the Fed? Hardly.
Friday’s employment report offered a cooler reading. Employers added just 29,000 jobs in September, well below the expected 84,000, while unemployment edged up to 4.2%. That remains historically low, but softer hiring and downward revisions to prior months deserve attention. One report doesn’t establish a trend; it does give policymakers something else to argue about.
Markets offered their own mixed messages. Foreign bonds gained 0.2% last week and cash added 0.1%. U.S. stocks slipped 0.3%, U.S. bonds lost 0.6%, and foreign equities declined 1.4%. Through three quarters, commodities and equities remain the performance leaders. Traditional U.S. bonds? Down 2.9% this year and 2.2% over the past twelve months. An uncomfortable showing for an asset class often hired to provide comfort.
The explanation is straightforward: rising yields push existing bond prices lower. The 10-year Treasury yield climbed nearly 0.9 percentage points during the quarter – its largest quarterly increase since 1994 – and reached a 24-year high. Higher starting yields improve future income potential, but they don’t erase today’s losses. Duration deserves scrutiny, and income portfolios deserve more thought than simply dusting off the old allocation.
Equity gains weren’t evenly distributed either. During the quarter, the equal-weighted S&P 500 fell 2.3%, while the small-cap Russell 2000 lost 7.5%. A handful of heavyweight technology companies can make the headline index look considerably healthier than the average stock. Bitcoin, meanwhile, surged 42%. Apparently, someone ordered their quarterly returns with extra espresso.
This week brings the ISM services survey and its pricing measures, along with 10- and 30-year Treasury auctions. Watch both economic demand and demand for government debt.
Enjoy your morning brew of choice, and have a productive week. Good morning.
Interesting data point of the week.
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