Bonds

Morning Brew Inc., Photo: Adobe Stock

Just when AI doomsday warnings were giving investors enough to worry about in equities, the bond market decided to pile on.

The 10-year Treasury yield briefly hit 5.04% this morning, while the 30-year yield climbed to around 5.4%, putting both at their highest levels since 2007.

A perfect storm

Oil prices have been rising as conflict in the Middle East threatens global supply. Those higher energy prices can filter into everything from gasoline and travel to diesel and manufacturing, stoking fears that inflation could stay elevated after an already-hot August CPI report.

That combo has investors betting that the Fed will fight back with higher interest rates. The central bank began its two-day meeting today, and traders are pricing in a tk% chance of a rate hike tomorrow, according to CME’s FedWatch tool. For bond investors, expectations of higher rates make older Treasury bonds—which pay lower yields—less attractive. The prices of those bonds fall, pushing their yields higher.

Then there’s the longer-term problem: Everyone wants to borrow. The national debt has surpassed $40 trillion, while hyperscalers are issuing huge amounts of debt to finance the AI buildout. More debt competing for buyers can force borrowers to offer higher yields to get investors interested.

On top of that, some of the bond market’s traditionally steady buyers are stepping back. Pension funds have sharply reduced the share of their portfolios held in fixed income, leaving fewer buy-and-hold buyers to absorb the growing supply of government debt.

Markets meet their match

Wall Street is increasingly worried that rising Treasury yields could spiral out of control. A Bank of America survey of 170 fund managers this month found that 33% now consider a “disorderly rise” in bond yields to be the market’s biggest tail risk, up from 27% in August, and overtaking an AI bubble as their top concern.

For investors, though, higher yields come with a silver lining. Existing bondholders have taken losses as prices fell, but new buyers can lock in some of the highest yields in nearly two decades. And that extra income gives bond portfolios more of a cushion against further price declines, while offering investors a return that can actually outpace inflation. That also creates tougher competition for stocks: Why take a risk with equities when Uncle Sam is offering a hefty 5%?

So, what’s bad news for the markets could be good news for investors with fresh cash. And if the bond selloff gets worse, Treasury Secretary Bessent can always try another buyback.—SY

      

Sponsored By VanEck

Why the disconnect? Refining capacity is tight, and product inventories are thin. That means refiners can sell regular gas, diesel, and jet fuel at prices that don’t fall lockstep with crude.

Refiners can be more insulated from swings in crude because of the “crack spread” between what they buy and what they sell. When that spread widens, refiners can look strong even while crude pulls back.

The VanEck Oil Refiners ETF, CRAK, seeks companies that generate a lot of their revenue from refining crude into fuels.

Connect now and learn more.

Stocks

🟢 What’s up

• Skyworks Solutions climbed tk% after its CEO said he is very confident that the company’s $22 billion merger with Qorvo will close this year.
• Applied Aerospace & Defense jumped tk% following a Guggenheim Buy rating that pointed to strong demand for defense products.
• Radiant Logistics surged tk% on quarterly earnings and revenue that easily beat Wall Street expectations.
• Waystar rallied tk% on reports that the healthcare software company is exploring a potential sale that could take it private.
• Biotech company Revvity gained tk% as management highlighted a strong order backlog that is expected to boost shipments through the rest of the year.
• Forgent Power Solutions soared tk% thanks to stronger-than-expected quarterly results and a $3 billion order backlog.

🔴 What’s down

• Dave & Buster’s tumbled tk% after reporting a surprise quarterly loss.
• Taser maker Axon Enterprise fell tk% on plans to raise $1 billion through convertible debt.
• Fintech company Enova International dropped tk% after withdrawing regulatory applications for its planned acquisition of Grasshopper Bancorp.
• Alignment Healthcare sank tk% as management declined to provide details on a key payment expected next year.
• Sysco slipped tk% following the pricing of a $1 billion stock offering.
• Circle lost tk% and Coinbase fell tk% after the Senate failed to advance a major crypto bill that would establish clearer federal rules for the industry (more on that later).

Vote of the day

Losing Clarity

Morning Brew Inc., Photos: Adobe Stock

After a long, tortuous journey, the Digital Asset Market Clarity Act arrived on the Senate floor for a vote this afternoon—only to fail miserably.

For those unfamiliar with the Clarity Act, it was poised to become the first major piece of crypto legislation in the US. But being first is a heavy burden: After sealing approval from the House of Representatives last July, it became an enormous political football.

Points of contention included:

• Who gets to regulate the crypto industry: The SEC and CFTC split the duties in the current bill, though despite being the smaller agency, the CFTC ultimately was given more power.
• Big banks were staunchly against the bill, arguing that it opens the door for stablecoins to usurp their role as a safe haven for consumers’ money.
• Democrats wanted stronger ethics guardrails, particularly against President Trump’s recent crypto ventures. Republicans largely agreed to their demands over the weekend—though opponents later proposed a counteroffer.

That 11th hour battle is what ultimately flushed the chances of the Clarity Act’s passage down the toilet. The bill needed 60 votes in the Senate to pass, but a split of 50 for and 49 against left it dead on the floor. Cryptocurrencies like bitcoin and ethereum dropped on the news.

With a Congressional recess looming in October and midterm elections shortly thereafter, it’s safe to say that the Clarity Act’s defeat leaves crypto legislation without a clear path forward until a new cohort of lawmakers arrives in DC. So much for clarity.—MR

Sponsored By VanEck

No cheaper gas. Crude prices moved down while refining margins stayed put. Tight capacity and thin inventories are to blame. That widens the gap (crack spread) that insulates refiners even as crude falls. The VanEck Oil Refiners ETF, CRAK, targets revenue from companies refining crude.

Bling bling

Morning Brew Inc., Photo: Evelyn Verdín/UnSplash

The same cohort we have to thank for Labubu mania has minted a new trend: The “little treat” economy. And if recent data is any indicator, they’re treating themselves to extra carats.

A trio of retail earnings reports points to a rising trend: Despite a broader downturn in consumer confidence, the luxury jewelry business is popping. Executives from Kohl’s, Macy’s, and Costco all cited their fine jewelry segments as a boon. Kohl’s, for example, will be rolling out “elevated fashion-jewelry fixtures” to 320 stores in November.

Part of this dynamic is a classic result of the K-shaped economy: Even when the economy tanks, the wealthy can keep spending on diamond earrings, since they’re insulated from plebeian problems like rising inflation and a slowing job market. Other factors include the falling price of lab-grown diamonds, fashion trends that prioritize chunky styles, and the disappearance of a middle market for luxury jewelry.

Gen Z eyes shiny things

But there’s another facet of why luxury jewelry is en vogue: Gen Z is splurging like there’s no tomorrow, economic anxiety be damned.

“Gen Z have the lowest savings-to-spending ratio of any generation, yet spending growth has remained resilient,” wrote Bank of America analysts Taylor Bowley and Lynelle Huskey in a note last month. Data shows the cohort’s discretionary spending strengthening in categories like coffee, beauty, and bling—suggesting Gen Z is jumping on purchases that give them immediate gratification. In other words: little treats.

Jewelry spending per Gen Z household was up 11% year-over-year in June, according to Bank of America data. Shiny accessories weren’t the only beneficiaries: The age group is embracing fitness culture and wellness trends, while ditching alcohol-related spending, BofA noted.

Maybe instead of the K-shaped curve, we should start calling this phenomenon the Z-shaped curve.—LB

      

News

• Nearly 40% of adults with young families expect to receive financial help from their parents or grandparents in the next year—and it’s draining boomers’ retirement savings.
• Wells Fargo just became the first major Wall Street bank to cut its S&P 500 price target.
• New analysis finds that President Trump has made 28,700 stock trades since taking office again—more than all of Congress combined.
• American incomes hit a record high last year as women’s pay rose.
• Costco is rationing motor oil as the Iran war takes its toll.
• Small businesses are avoiding succession planning—here’s why that’s causing so many problems.

Calendar

August retail sales and the NAHB housing market index are among the reports investors should keep an eye on tomorrow—when they’re not glued to their televisions waiting for Warsh to speak.

The new Fed chair has his work cut out for him tomorrow afternoon. Markets are widely expecting the first interest rate hike in three years as inflation remains well above the central bank’s 2% target. But President Trump has made no bones about calling for lower interest rates over the years. So far the relationship between the Fed and the White House seems simpatico, but that could all change if Warsh leads the central bank in a different direction.

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