Market Thoughts: Here it goes again?

Kevin Warsh got a ‘tip of the hat’ from the bond market, not only for his press conference, but recognizing the importance of corralling a unanimous vote to raise rates. An effective central bank lets markets do the heavy lifting for it. The Federal Reserve (Fed) did just that. They may have to again.

Without stability in the Gulf, it doesn’t get easier from here. Government bond markets are collectively under pressure. Anxiety, predominantly driven by the war. The ‘magic trick’ to steady markets? A ceasefire and/or a resumption of tanker flow through the Straits.

Rising debt levels and fiscal laxity across developed economies are a structural issue. Investors are demanding higher yields knowing more debt is coming. The same is true for corporate issuance. Investment grade (IG) issuance last year was $1.8 trillion. We may be on our way to $2 trillion this year.

Hyperscalers represent about $200bn of $1.6 trillion in year-to-date IG issuance, again in round numbers. Given the yield pick-up to similar maturity government bonds, investors pivoted to credit. EPFR fund flows report +$155bn of inflows into global government bonds this year. Munis saw about +$80bn.

Investment grade credit, high yield and emerging markets debt have seen something like +$500bn of inflows. Credit markets continue to crowd out government bond purchases. Central banks continue on their slow march away from dollar (USD) denominated assets.

Over the past ten years, USD denominated reserves globally fell from 55% to just under 40%. The percentage of U.S. Treasury bonds held by foreigners fell from 50% to 30%. And if you look only at foreign official institutions, the numbers are about 35% and 10%, respectively. All round numbers. Foreign official institutions include central banks and other foreign government holdings.

Central banks are price inelastic. They’re price takers because they have to hold reserves. With rates inching higher, and fewer strategic buyers, government bond markets will remain bumpy as policymakers try to tame sticky inflation. They were on the right track before the war started.

Near term, I’m cautious about the bond market. Kevin Warsh made a point at his presser to emphasize the Fed’s recent hike was one that removed accommodation. Yields have moved higher, but in the context of above trend growth and balanced labor markets, policy rates aren’t restrictive.

There’s an expectation in markets that additional rate hikes are coming. Maybe, but were the Gulf to calm, they’d be pushed out. The energy shock central banks find themselves having to react to would no longer be their motivating call to action.

We may see more rate hikes in Europe, but they’d be grounded on fundamentals. One theme we’re spending a great deal of time on is whether we’re heading into a cycle of higher-for-longer interest rates. I’m certain policymakers are as well.

Higher-for-longer interest rates eventually weigh on growth and consumption. In aggregate, the consumer remains strong. Banks have been emphasizing that in the C-Suite conversations we’ve been having ahead of third-quarter earnings. We’re overweight global financials across multi-asset portfolios.

Growth is strong. The Fed’s recently published Summary of Economic Projections signaled expectations for above trend growth this year and next. And as I’ve said before, above trend growth can handle +2.5-3% inflation. That said, there’s a credibility issue about getting back to 2%. No pressure.

I did a recent call with some of our clients in Asia. I was joined by Jeff Eshleman, who heads the investment team that manages our international multi-asset portfolios, including Asia. I was asked by the moderator if anything over the past few years has reshaped how I think about investing.

My response was the impact on markets from retail investors. They’ve become a driving force of momentum. Also, market support. They’re using a more sophisticated investment toolkit that continues to evolve. And they’ve been +25% of daily volume traded on the S&P 500 this year per J.P. Morgan Investment Bank.

Retail is a global force to be reckoned with. They’ve added liquidity to markets. A ‘good’ thing structurally for underlying trading dynamics. Retail’s managed to quicken the pace of intra-day turnover, especially at moments of inflection. Something to be mindful of... additional volatility.

If I have one concern, it’s the use of indiscriminate leverage. Effectively, leverage used to chase after a golden ticket. Think back to markets in June and July. I believe in the use of leverage when it’s risk managed. As a ‘win-or-lose’ punt on the flip of a market, it seems an emotionally taxing way to invest. Here it goes again?

Unless explicitly stated otherwise, all data is sourced from Bloomberg, Finance LP, as of 9/17/26

EPFR fund flows data as of 8/31/26

Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.