Long – Term Treasuries Are Misbehaving

Executive Summary  

Last week, the S&P 500 returned -1.4% as hopes for a deal to end the war in the Middle East faded; oil prices and treasury yields rose. Semiconductors stocks fell. The U.S. Treasury announced a plan to increase long-term treasury purchases, though the relief in bond yields proved temporary. Mid cap (-1.2%) and small cap (-1.6%) stocks fell in line with large caps. Within the S&P 500, healthcare (+4.3%), energy (+2.9%) and materials (+2.3%) were the only sectors posting gains; utilities (-3.5%), industrials (-3.4%) and technology (-3.2%) were the worst performing. While non-US developed EAFE markets returned -0.5% and EM markets returned +1.2%.  

The U.S. Treasury’s announcement to increase purchases of long-dated Treasury bonds contributed to the weaker dollar index falling 0.9%. The weaker dollar reignited popular “debasement” and “sell America” trades, benefiting assets such as Bitcoin (jumped 23.3% to $77,505), gold (up 5.2% to $4,603/oz), and non-U.S. equities (outperforming S&P500 by ~100bps). The commodities complex rose 4.6% as energy prices rose 6.5% for the week. Brent prices rose 6.6% to $94/bbl. U.S. natural gas prices rose 1.5% while European gas rose 8.0%; both remain volatile based on war and weather-related headlines.  

Long-term Treasury yields continue to face upward pressure as economic growth remains resilient, inflation stays sticky, and government finances deteriorate. While the Treasury’s efforts to support longer-dated bonds proved last week it’s unlikely to reverse the forces driving yields higher. Meanwhile, financial markets continue to benefit from rising corporate profits and supportive AI capex.  The hyperscaler investment-grade issuance is being funded partly with debt issuance that is competing for credit investors considering US Treasuries and other sovereign issuers.    

The US 10-year yield touched its highest level since January 2025.  Freddie Mac stated the average rate on a 30-year fixed-rate mortgage was 6.65% for the week, down from 6.67% in the prior week but above the 6.58% average seen a year ago.   The National Association of Realtors reported that pending home sales dropped 2.3% from the prior month in July, falling to the lowest level since January, while Census Bureau data showed that housing starts declined more than 12% from June to a seasonally adjusted annual rate of 1.239 million.    

Key Takeaways  

1. Consumer spending showed further signs of softening in July. Retail and food-service sales fell -0.6% month-over-month after rising just +0.2% in June. Unlike in June, July’s weakness was broader than gasoline alone, with sales excluding autos and gasoline declining -0.2%. A portion of July’s decline likely reflected the timing of Amazon’s Prime Day sales event in late June, which may have pulled forward online purchases. Despite the slowdown, consumers continue to spend. Total retail sales were +5.0% above a year ago, while restaurants and several store categories posted gains. Implication – The past two months point to a consumer who is still spending, but at a more moderate pace compared to earlier in the year.  

2. Consumer confidence also weakened in early August due to continued concerns about inflation. The University of Michigan’s sentiment index fell to 51.0 from 55.2 in July, reversing two months of improvement. Only 8% of consumers said they expected their income growth to outpace inflation over the next year, down from 18% in December, as higher prices, including energy costs, continued to weigh on purchasing power. Implication – Sentiment doesn’t always translate directly into spending, but weaker confidence and persistent concerns about purchasing power suggest the consumer may be softening. 

3. Higher oil prices and a cautious Federal Reserve are complicating the outlook for interest rates. Oil prices moved higher again last week as tensions around the Strait of Hormuz raised concerns about energy supply. Higher energy costs can pressure consumer purchasing power while also adding to inflation, complicating the Federal Reserve’s policy outlook. Minutes from the Fed’s July meeting showed policymakers remain concerned about inflation, with some officials open to additional tightening if price pressures don’t improve. Implication – Softer consumer data would normally strengthen the case for lower interest rates, but higher energy prices and persistent inflation could limit how quickly the Fed is able to respond.  

4. Long-term Treasury yields aren’t behaving the way they typically would when growth softens. The 30-year Treasury yield climbed above 5.30% last week, its highest level since 2007, even as retail sales and consumer sentiment weakened. Softer growth would typically increase demand for Treasuries and push yields lower. However, inflation concerns and heavy government borrowing continue to put upward pressure on long-term rates. Implication – If this relationship persists, longer-maturity Treasury bonds may not provide the same degree of portfolio protection they have historically offered during periods of weaker growth.  

5. Stocks are working to digest the rise in long-term interest rates. Rising Treasury yields created a challenging backdrop for equities last week, particularly for areas of the market that trade at higher valuations. Higher bond yields give investors a more attractive alternative to stocks, which can put downward pressure on equity valuations as stocks compete with higher-yielding bonds. Stocks have remained relatively resilient despite the rise in interest rates, but the move in rates has contributed to increased volatility. Implication – Higher interest rates can be a potential headwind for equities. However, rates are only one factor influencing market direction, with earnings growth and the economy also impacting forward returns.