The pain trade for markets feels higher. Analysts keep ratcheting up year-end targets. Markets are where they are because of fundamentals. Corporate margins are resilient. We’re getting the macro landscape envisioned in January, before April tariff taunts unfurled. Labor markets continue to weaken. Arguing concern, not alarm.
The Fed appears set to cut rates at its September 16-17 meeting. Labor markets drive the decision. August payrolls data argues for it. With a building chorus to ease, a September cut is prudent. Is it necessary? As insurance against weaker labor markets ahead, yes.
Bond vigilantes have been riotous at the long end of the curve. Bearish steepening seems the path of least resistance globally. The long end of the U.S., European and Japanese government bond curves are wobbly. I expect bond market volatility to remain high.
There’s rising concern about the weakness we’ve seen at the long end of bond curves. What’s driving it? Fiscal spending and anxiety that governments are adding to their debt burden. Investors are voting with their feet. More debt, higher long term rates.
With an appellate court having upheld the Court of International Trade’s ruling that the Trump administration exceeded its power on levies, investors now wait to hear how the Supreme Court will rule. That was an ‘added kick’ to the U.S. bond market.
Why? The Congressional Budget Office (CBO) forecast that the recently passed One Big Beautiful Bill Act will increase the government deficit by $4.1 trillion over the next decade. The CBO likewise estimates tariffs can raise government revenues by $4 trillion over that same period.
Both S&P and Fitch reaffirmed current government bond ratings, citing tariff revenue as counterweight to spending. That’s now in doubt. Bond vigilantes reminded Washington they’ll be held to account, driving up long term interest rates. Washington should pay attention.
Pundits continue to swirl headlines of September being the ‘worst month’ for equity markets. To riff off a line from Mark Twain, September and all the other months of the year. Twain actually said October and then listed the remaining eleven months in random order. A random walk.
The challenge for investors is the ‘short term’ trade. Do markets move higher or lower from here? Effectively, how do risk seekers pair a Fed rate cut with a steepening bond curve that reflects rising concern over the U.S. debt load, bond issuance and fiscal profligacy?
There’s a narrative circling a majority of White House appointees to the Board begets a dovish Fed. Maybe. But an FOMC seen as politically biased or influenced will keep bond markets under pressure. Where bond yields lead, risk assets follow. A steepening bond curve will reset higher the risk premia demanded by investors.
I keep a crystal ball in my office to remind me markets are a random walk. Occasionally a quick sprint up, down, and then up again. It’s been quite a ride.
Markets face a challenging month ahead. I’d be glad to see risk assets broadly range bound. That is until we see a big enough sell-off investors question buying into it. Right now, buy the dip is the market mantra. Sell the rip may creep into the narrative. So far, it hasn’t.
Should I stay, or should I go? I don’t believe valuation levels currently argue overreaching for risk. For long term money, stay invested.
Unless explicitly stated otherwise, all data is sourced from Bloomberg, Finance LP, as of 9/04/25.
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.
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