Soundings

Some weeks it’s hard to distill a key theme or thread in our Monday morning meeting. This week virtually every topic led back to the bond market.

Our review of performance across the major asset classes showed that as of Friday, the Bloomberg US Aggregate Bond Index – comprised of over 10,000 U.S. government, corporate, mortgage- and asset-backed securities – had lost 1.0% of its value on a total return basis, quarter to date. Bond prices move inversely to interest rates and bond yields. Interest rates on 10-Year Treasuries (~45% of the index), as well as corporate bonds (~30% of the index), are up more than 0.5% year to date. Rates on mortgage-backed securities (~25% of the index) have increased a little over 30 bps.

Inflation has settled in a little over 3%. Savers must earn a return of 3% to maintain the purchasing power of their money. Money market funds currently offer investors rates of 3.3 – 3.6% to compensate for above target inflation. The yield curve for U.S. Treasuries remains positively sloped – long-term interest rates are higher than short-term interest rates – suggesting investors expect continued economic growth and compensation for extending their investment horizon. Yields at the long-end of the curve have been climbing steadily over the course of 2026 – from 4.86% for 30-year Treasuries at the start of the year, to 5.31%, a level not seen in almost two decades.

This increase in yields is understandably problematic for a country with a national debt of $40 trillion. Current estimates have U.S. debt service at $3 billion daily. Our chief macro trader (see Big in Japan) announced mid-week that the Treasury will double the size of its buyback of long-dated bonds to the tune of $4 billion per operation. Introduced in 2024 by former Treasury Secretary Janet Yellen, these operations were intended to enhance the liquidity of longer-dated (10 to 30-year) bonds. Under Treasury Secretary Scott Bessent, it appears that these operations will be more opportunistic with the intent of impacting long-term interest rates. Over at the Federal Reserve, where Chairman Kevin Warsh and the Board of Governors have multiple tools at their disposal to manage interest rates: crickets. Warsh has previously suggested an originalist approach to the Fed and its inflation target of 2% which would suggest higher rates. At its July meeting, the FOMC held rates steady (3.50-3.75%), but three of the twelve voting members dissented in favor of a 0.25% increase.

So far this month, gold and cryptocurrencies, both components of a U.S. dollar “debasement trade” which is intended as a hedge against a U.S. dollar devaluation have been on a tear. As measured by the U.S. Dollar Index (DXY), through Friday, the value of the U.S. dollar has declined almost 2% in August.

Two important questions arose over the course of our meeting. Should an investor continue to own bonds? And should a portfolio have inflation protection? The short answer is yes, but what you own and how matters – more so today than in many prior moments in our investment careers.

Tide Cycle Resources (Tide Cycle) is an investment advisor registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. A copy of Tide Cycle’s Forms ADV Part 2 and Form CRS are available without charge upon request. The opinions expressed are those of Tide Cycle. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Nothing contained in this document may be relied upon as a guarantee, promise, assurance, or representation as to the future. This should not be taken as specific investment advice. We recommend consulting an investment/tax professional before making financial decisions based on any information provided.

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