The Overnight RateBagehot meant banks. This week the proving is being done by the lower-rated end of corporate America, and the price of the argument is about 8%.
- The 10-year Treasury closed Tuesday at 5.26%, its highest close since June 12, 2007 (Treasury). The 2-year, which tracks the next few Fed meetings, went the other way, to 4.89% from 4.92%. Mortgage News Daily’s average 30-year quote finished Tuesday at 7.58%, the highest since Nov. 1, 2023 (Mortgage News Daily). On a $300,000 loan that’s about $2,114 a month in principal and interest.
- Tuesday’s issue named two lines as news: consumer confidence under 86, and Case-Shiller at 2.5% or more. The Conference Board’s index fell to 81.9 from 88.6, with its six-month expectations gauge at 63.6 (Conference Board). The 20-city Case-Shiller index was up 2.5% from a year earlier in July, from 2.2% in June (S&P Cotality Case-Shiller). An October hike went from 68% to 42% on Polymarket, while December sits at 74% (Polymarket). Most of the bet slid a meeting. One miss of ours: that issue put those releases in the afternoon. They printed at 9:00 and 10:00 ET.
- The S&P 500 closed Tuesday at 7,670.84, down 0.17%, its second down day and about 0.9% under Friday. The Dow slipped 0.26% and the Nasdaq 0.09% (Yahoo Finance). Recession by year-end held at 9% on Polymarket through the confidence drop (Polymarket). I read that as a crowd that thinks households feel worse and keep spending anyway.
Threshold: 8:30
BEA publishes August PCE, the inflation gauge the Fed targets, at 8:30, alongside the third estimate of second-quarter GDP and corporate profits (BEA schedule). July’s core PCE, excluding food and energy, rose 0.2% on the month and 3.3% on the year. Headline was 0.2% and 3.7% (BEA). Trading Economics has the August core consensus at 0.3% and 3.4% (Trading Economics).
Same line as Monday’s issue: a core monthly print at 0.4% or more, or 0.1% or less, is news. Anything in between probably leaves October near a coin flip. The second estimate had GDP growing at a 1.5% annual rate and profits up $400.9 billion (BEA).
Who pays: the junk-rated borrower
ICE BofA’s high-yield index, the bonds of companies rated below investment grade, yielded 8.03% on Monday, from 7.46% a week earlier. Its spread over Treasuries went from 2.73 percentage points last Wednesday to 3.02 (FRED). Investment-grade companies yield 5.97%, and their spread barely moved, 0.77 to 0.83 (FRED). Strong borrowers are paying for higher Treasury yields; weaker ones pay a doubt premium on top.
The mechanism, once: a company refinancing a maturing bond pays the new yield on the whole amount for the life of the new bond. At last week’s 7.46%, a $100 million issue costs $7.46 million a year in interest. At Monday’s 8.03% it’s $8.03 million, $570,000 more, every year until it matures.
Payer: the lower-rated company with a bond coming due now. Payee: the bond buyer who waited a week. The yield only bites when the old bond rolls, so I’d argue the maturity calendar matters more here than a week of stock prices.
Net net: a junk-rated company that refinances this week pays about 0.6 points a year more than one that refinanced last week, and it keeps paying.
Headlines
- The FDIC’s national average savings rate is 0.37% as of Sept. 21, four days after the Fed’s hike took effect, and a 12-month CD averages 1.73% (FDIC). The Fed pays banks 3.90% on reserves (Fed). Our Sept. 21 issue doubted savers would see a quarter point by Christmas. So far the average has slipped a hundredth.
- Freddie Mac’s weekly 30-year prints Thursday at noon from 7.03% (Freddie Mac). A 7.25% weekly print this year is 79% on Polymarket, from 63% in Tuesday’s issue (Polymarket).
- An Iran-Oman agreement on Hormuz shipping by Sept. 30 expires today at 4% on Polymarket. The Oct. 31 contract is 23% (Polymarket). Shippers and diesel buyers carry the risk premium until one of them resolves yes.
PCE at 8:30 decides whether October gets back above a coin flip.