Back to School

Though it arrives sooner than expected every year, the last week of August is upon us. In my mind at least, the close of the month has always felt like the formal end of Summer as the customary inflections of the season follow soon after. It’s a week that at every stage of life seems to provide us with a transition of some kind. The hot summer weather starts to wane, the sports seasons shift as your favorite baseball team makes a run for the playoffs (and if they don’t, it’s quickly on to thinking about football), vacations wind down, kids go back to school or off to campus, and for us working folks, the hub drub of corporate calendars and deadlines tends to pick up. While not all the changes are substantial, what’s clear is that with September just ahead, the end of the year feels a little less distant and we tend to shift our priorities in anticipation of what’s ahead.

This year, the close of August hit home with my oldest daughter starting kindergarten. Dropping her off at school, it was a joy to see her reunited with preschool classmates and friends, ready to embark on the year’s journey of learning, meeting new people, experiencing new things, and paramount in the mind of a five-year-old, having as much fun as possible. Just before the bell to start school, we watched as the kids haphazardly ran about their playground, having all but forgotten about their parents or any real reason for being there. On cue at the turn of the hour, their new teacher opened the door and kindly called them into formation and to follow her into her classroom. Almost immediately, fifty little eyeballs locked on their instructor. While some of the children had met her before, it was clear from their expectant upward glances, they were at the very beginning of understanding what their teacher’s gentle tone and command of the classroom would bring over the year ahead.

While the academics are a touch different, this week is also shaping up to be a “back to school” moment for markets. Thursday and Friday in particular, class will be in session at the annual Jackson Hole Economic Symposium. The event features an international cadre of global central bankers and policymakers gathering to discuss monetary conditions, currencies, regulatory prescriptions, and provide commentary and outlook on the economy. Widely watched, the event should draw considerable interest this year as market participants seek to learn from Federal Reserve Chair Kevin Warsh, delivering keynote remarks on Friday afternoon, August 28. [i]

His commentary should be of unique interest given the market backdrop approaching the event. While the month of August hasn’t delivered anything notable in terms of stocks, a certain segment of the fixed income market has drawn significant scrutiny. Around the end of July, long-term U.S. treasury yields jumped, moving considerably higher to a level north of 5% - the highest level in over fifteen years. While the 30-year yield has hovered close to 5% a few times coming out of the 2020 covid era, in prior instances it has pulled back or reset.[ii] To some observers, this move felt more like a breakout as rates have crept higher all year. The question for investors is: does this matter or not?

While the rate move was widely attributed to familiar concerns – large fiscal deficits, persistent inflation, uncertain Fed policy, geopolitical risk, and debt sustainability – those are established facts, not new information to the market. Long-term rates move higher for a variety of reasons including debt issuance, economic growth expectations, Federal reserve policy, and more simply, the extra yield investors require to accept the uncertainty of holding a long-maturity bond. For now, we don’t see the move as cause for concern. Short-term rates have remained anchored, telling us that market expectation policy rates haven’t changed, and more importantly inflation breakevens (which track the yield difference between a standard nominal government bond and an inflation-protected security of the same maturity) have remained stable. This suggests those worried the uptick on the long end foreshadows higher inflation may be misguided. Our sense is that the move has more to do with a combination of a potentially higher baseline neutral rate of economic growth, additional term premium (extra yield) demanded from investors to hold long term rates, and changing supply and demand dynamics in long term bonds. Recently, there has been competition from AI and hyperscalers who have issued debt in that space.

Treasury Secretary Scott Bessent addressed the supply and demand dynamic directly with the Treasury’s August 19th announcement of a plan for liquidity support in long-term treasuries. The Treasury is at least doubling the cap on liquidity-support buybacks in the 10–20-year and 20–30-year nominal bond coupon sectors, effective September 9 through November 4.[iii] While the dollar amount is actually insignificant (a humble $4 billion per operation), the targeted tenor approach and the market’s favorable reaction (rates are down a touch since the announcement) reinforce our view that we shouldn’t read more into the rate move than necessary for now. Heading into Jackson Hole, the practical issue is likely to be whether Warsh validates or challenges the current long-end narrative. Somewhat ironically, Bessent’s action at the Treasury is at odds with the Fed chair’s preference for “market dependence” and “real-time data”.[iv] How accurate is your data when your counterpart at the Treasury is intervening in the market? We’ll be watching to see if his message alters the market’s view of the Fed’s reaction function and independence, inflation credibility, as well as tolerance for market-determined long-term rates.

Recent Readings:

Scott Bessent, Stanley Druckenmiller and a hedge-fund legend - Fortune

What if – Andy Constan, Damped Spring

Forbes advisor list update: Morgan Stanley drops it, owner says changes are coming – InvestmentNews

[i] https://www.kansascityfed.org/research/jackson-hole-economic-symposium/

[ii] https://fred.stlouisfed.org/series/DGS30

[iii] https://home.treasury.gov/news/press-releases/sb0607

[iv] https://www.ap.org/news-highlights/elections/2026/warshs-gamble-a-quieter-federal-reserve-could-mean-volatile-markets-higher-rates/

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