Week Ending: September 4, 2026
Blame Game
Decomposing The Change In The 10-Year Treasury Yield
Source: Federal Reserve, D'Amico, Kim & Wei (2018), Payden Calculations
Model combines yield curve data with survey forecasts; updated monthly through July 2026
This week, U.S. 10-year Treasury yields matched their 2023 highs. What is driving rates higher? And are we experiencing a repeat of 2022-23? One way to answer these questions is to decompose yields into their key drivers: the real interest rate, the inflation premium, and the term premium. In both episodes, markets priced in a more hawkish Fed, driving yields up via the real rate component. The inflation premium also added to yields amid upside inflation surprises. Core inflation surged in 2022, and today it is much stickier than what investors expected at the start of the year. More interestingly, the term premium is doing more work today than in 2022, as heavy Treasury issuance, surprise buyback announcements, and the Fed's water-downed forward guidance have investors demanding more compensation to hold duration. Where do rates go next? Answering that requires you to have a view on (a) whether the Fed hikes more or less than is already priced, (b) whether inflation remains stickier than markets expect, and (c) whether the fiscal situation improves. Our hunch is that the three drivers suggest long-term rates may still have room to rise.
Total Returns By Asset Class
Highlights of the Week:
High Yield: The high-yield market closed out the pre-Labor Day weekend light on new supply, but remains constructive underneath. Spreads continued to grind tighter in August, and that backdrop sets up an attractive dynamic heading into September, which historically brings a flood of new issuance as borrowers return from the summer. For investors, a healthy post-holiday primary calendar would be a welcome sign of continued confidence in the asset class.
Municipals: The Bloomberg Municipal Index returned -0.2% in August, while high-yield gained 0.2% and taxable munis gained 0.4%. Year-to-date, investment-grade munis are up 0.2%, high yield is up 2.7%, and taxable munis are down 0.1%. Municipal funds recorded $138 million of inflows for the week ended September 2, extending the positive streak to 20 weeks. Year-to-date, inflows total $69.3 billion, the second-highest on record for the comparable period, trailing only 2021.
Equities: The U.S. equity market posted modest gains for the week supported by resilient economic data and continued strength in technology and AI-related companies. Performance across sectors was mixed, with energy, technology, and utilities leading the market higher while consumer discretionary, materials, and industrials were the market laggards.
Disclosure: This material reflects the firm’s current opinion and is subject to change without notice. Sources for the material contained herein are deemed reliable but cannot be guaranteed.
