First Friday: Trouble in the Bond Market

0:00We're going to start today with some very good news. And actually, we have great news on multiple fronts. We've got great news about the job market, great news year-to-date around the stock market, around the commodities market. We have volatile news around the bond market. We'll talk about that too. But I'm going to lead with some very, very good news that came out of Nepal this morning. Because nine days after the floods, two people have been found alive. Two people have been rescued. Which is nothing short of a miracle. And it is so uplifting after a tough nine days to have such good news. So we're going to cover all of that and more in this first Friday episode of the Afford Anything podcast.

0:41Welcome to the Afford Anything podcast, the show that knows you can afford anything, not everything. On Tuesdays, we typically answer questions that come from you. And on Fridays, we typically interview guests. But there's one exception, and that is the first Friday of every month when we do a macro macroeconomic look at the economy, the markets, the world around us. So welcome to the September 2026 First Friday Afford Anything episode. I'm your host, Paula Pant. If you didn't catch my remarks on last Tuesday's episode, I am Nepali. I am from Nepal. I was born there, which is why even though we normally just talk about the US economy on these episodes, I would like to kick off by sharing some really uplifting news.

1:33Sanjay Shah, age 30, is a mechanical foreman who is trapped in a hydropower tunnel in Nepal. And when the flood started, he ran to warn his co-workers to get to safety, and he got trapped. He has been 557 feet underground for the last nine days, trapped in a tunnel in complete darkness, he was rescued this morning. And medical assessments have confirmed that his vital signs are normal and he is in stable condition. Kabir Maharajan, age 45, was a mechanical supervisor. He was also trapped 557 feet underground, and he was also rescued this morning. This is such incredibly uplifting news. At a time when many people had given up hope, it is such a testament to the persistence of the rescuers, the rescue operations.

2:33I posted a video on Twitter. The video came from the Nepali army. One of the rescuers is not wearing shoes. Let me just repeat that. one of the rescuers is not wearing shoes. Now, I don't know why that is. I don't know if he showed up to the site with shoes and somehow lost them off his feet mid-operation. I don't know. Certainly the mud can be very thick. I can imagine how it would pull a shoe off or both shoes off. But you think about what it took for a team of rescuers, at least one of whom is barefoot, to descend 557 feet underground after nine days when you are tempted to give up hope. But they remained hopeful and they kept searching and they persisted.

3:27And today they saved two lives. You know how the rescuers found them? So both men, over these nine days, the way that they maintained their strength was by praying. And that was how the rescuers found them. And they were praying out loud, and the rescuers heard their voices. Right now, in one of Nepal's big newspapers, there are photos of the father of one of the rescued men arriving at the airport in Kathmandu in order to reunite with his son. What an incredible, inspirational story. And I also want to take a moment to give such sincere appreciation to people everywhere who are rescuers, who are first responders.

4:12So to people all over the world who are firefighters, paramedics, police officers, search and rescue teams, emergency workers, ordinary people who show up in the aftermath of a disaster and it's hard and it's physically and mentally and emotionally grueling. I want to take this moment to appreciate people all over the world who are first responders, who are search and rescue. You're doing God's work. Thank you. How do we transition from that to the jobs report? I guess we just do it, right? Well, so the jobs report came out. The U.S. added 162 ,000 jobs in the month of August. This wildly exceeded expectations.

5:05It tripled expectations. So analysts, experts, investors were expecting 53 ,000 jobs. This is triple. What we actually got was triple that number. The bulk of those jobs were in the private sector, 127 ,000 private sector jobs, 35 ,000 government jobs. The unemployment rate held steady at 4.1%. Labor force participation ticked up by two-tenths of one percentage point. And the broadest measure of unemployment ticked down, decreased, by two-tenths of one percentage point. So, unemployment steady, labor force participation slightly up, unemployment in its broadest form, and when I say its broadest form, there's a particular measure that tracks not just unemployment, but also underemployment.

5:58That's what I mean when I say its broadest form. So unemployment in its broadest form, including underemployment, decreased, which is good. So good news on both fronts. And jobs tripled our expectations. We also revised our previous numbers from July to show 21 ,000 more jobs. So July initially had shown a loss of 23 ,000 jobs. We actually created 21 ,000 more jobs than we had previously known about. So that loss is not as steep as we had initially thought. In other words, lots of good news from the labor market. June also has final revision. So the standard practice for the BLS is to do three revisions.

6:47You do a revision after one month, you do another revision after two months, and then you do a big annual revision. So what that means is that we're always going to have numbers, revision numbers for the previous two months. So we know the revised numbers for July, they're better than we thought. We also now have revised numbers for June, two months out. It shows that June had a gain of 31 ,000 jobs. That means June was not quite as good as we had initially thought. June had originally been reported as 57 ,000 jobs. Still, the data overall is quite strong. Now, the best performing sectors from July to August are leisure and hospitality, which gained 62 ,000 jobs, and state and local government gained 40 ,000 jobs.

7:30The worst performing sectors, information, IT, loss of 23 ,000 jobs, and financial activities, loss of 11 ,000 jobs. Zooming out and looking at the full year, tracing August 2025 through August 2026. Over the span of the last 12 months, the best performing sectors were private education and health services, which gained a little over half a million jobs, and professional and business services, which gained about 150 ,000 jobs, 152 ,000 to be specific. The worst performing sectors were federal government jobs, which decreased by 242 ,000, and information IT jobs, which decreased by 115 ,000. Now, let's compare BLS data to the ADP report.

8:20First, as a reminder, when we talk about the jobs report, we're pulling that data from the BLS, the Bureau of Labor Statistics. Those job numbers come from surveys that they do of roughly 121 ,000 businesses and government agencies, which represent about 631 ,000 work sites. And critically, that number tracks jobs, not people. So if one person is holding two jobs, then that counts as two jobs in the payroll survey. Separately, the BLS also surveys about 60 ,000 households, and that's how they produce the unemployment rate, the labor force participation rate, their data on underemployment. That's how they look at not jobs, but people.

9:07So that's what the BLS does. And separately, there's this other company, it's called ADP, and they are a private payroll processor. And every month, two days before the BLS puts out their jobs data, ADP publishes private sector data based on the payrolls that they process. And ADP is a big enough company that they have a really, really large data set. But critically, ADP only services the private sector. And so when we get ADP data, we are, number one, only getting data from ADP customers. And number two, necessarily that means we are only getting private sector data. The ADP report, because it comes out two days prior to the BLS report, it's a good, when people are trying to make guesses about what the BLS is going to come out as, ADP is a good foreshadowing, good precursor.

10:01So the ADP report showed that private sector employment increased by 38 ,000 jobs in the month of August, and that marked the slowest pace of hiring in seven months. So we're getting very different reads from ADP versus BLS, getting a lot of optimism from the BLS data, and we're getting some cautious slowdown from the ADP data. That was part of why the BLS data this morning blew everybody out of the water, right? That was why it tripled expectations. Expectations were low in part because the ADP report was also fairly low. A couple of highlights from ADP data. According to the private sector survey, it also found that growth was led by leisure and hospitality.

10:50So those two data sets matched up when it came to that sector, education and health services. Absolutely. So that matched up when it came to that sector. ADP also found job growth in construction. Where the job losses happened were in manufacturing, which lost 17 ,000 jobs, and professional and business services, which lost 16 ,000 jobs. ADP also found that it's the biggest companies driving the gains. So large companies, defined as companies with more than 500 employees, drove those gains by adding 34 ,000 new jobs in the month of August, while small businesses added only 3 ,000 jobs and medium-sized businesses were flat.

11:33Zooming out, what we see here is a slightly conflicting narrative. ADP would urge a little bit of caution, still optimistic, but cautiously optimistic, and BLS would be very optimistic. These are great numbers. In fact, it was the strength of the BLS data that caused counterintuitively, well, you can never really say what causes a market to decline. So let me temper this statement. I can't say it caused a market decline. What we know is that after the jobs report data came out this morning, the market actually counterintuitively dropped a little bit. Now, why is that? why would the stock market show a slight decline?

12:20Like why would traders show a little bit of hesitation on good jobs data? Well, it's because if jobs data is strong, that increases the likelihood that the Fed will approve a rate hike at their September meeting, their meeting later this month. And so if jobs data is strong, therefore the Fed has a higher likelihood of increasing interest rates. Therefore, investors are more worried because increased interest rates means higher cost of capital, which means business slowdown, which means stock market slightly declines. So it's counterintuitive, but a strong jobs report can, again, I don't want to make the attribution, I don't want to cause and affect it, but a strong jobs report can correlate with a market decline, as we saw this morning.

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17:08Welcome back. So if you want to understand what's happening in the economy, don't look at the stock market, look at the bond market. Why is that? Stocks and stocks have done very well this year. year to date, the S &P 500 is up about 13%. But stocks are largely about companies. And in fact, the market is overwhelmingly driven by just a small handful of the biggest companies. So if people expect that those companies will do well, even if the underlying economy is a little bit shaky, the stock market might still rise because expectations around how those companies will perform are still strong. Now, the bond market, by contrast, is about interest rates, inflation, the deficit, what the Fed's going to do.

17:59And the bond market right now is telling us a volatile story and potentially a story with some red flags. So let's take a look at the bond market and then listen to the story that it's telling us about our current economic conditions. So first of all, the 30-year Treasury yield is holding steady at around 5.26%. What does that mean? It means if you loaned money to the U.S. government and you loaned them that money for 30 years and you hold that bond to maturity, meaning you hold it for the full 30 years, which that's a choice, but if you did hold that bond to maturity, your annualized return would be about 5.26%.

18:40That is the price of money. And so who sets the price of money? Does the government decide we're going to pay 5.26 %? No. The price gets set by what investors demand. The price gets set by the market. And 5.26 % is very high relative to what it has been. And that means the market is saying, we're really worried about inflation. We're really worried about rising government debt and big fiscal deficits. Because of all of that, we're demanding a higher return if we're going to take on very long-term government debt. So right now, the 30-year Treasury yield is about half a percentage point higher than the 10-year yield.

19:30So the difference, let me just state that in a different way, the difference between the yield on a 10-year versus the yield on a 30-year is about one half of one percentage point. In early 2025, it was only about two-tenths of a percentage point. So a year and a half ago, the difference between a 10-year versus a 30-year was a lot smaller. And what that means is that investors are increasingly worried, even more worried than they were a year and a half ago. They're increasingly worried about debt, deficits, and inflation. So that's what we can learn by looking at the 30-year. But now let's take a look at the 10-year and the 2-year.

20:16Those signal different things. The 2-year is largely a bet on what the Fed is going to do, right? 2-years is relatively short term. 10-year is a much bigger bet. The 10-year, similar to the 30, is a bet on what's going to happen with inflation and borrowing over the span of the next decade. Remember, Social Security is projected to go insolvent in 2032. That's only six years from now. And to be clear, when I say insolvent, that doesn't mean it goes to zero. It means unless something changes, benefits will get reduced. Anyway, so when you're buying a 10-year treasury, you're making a bet on what's going to happen with inflation and borrowing and the budget over the span of the next 10 years.

21:07And we already know that we have some problems that we need to solve within that 10-year time span. And what we can see looking at the 10-year is a lot of volatility. So on September 1st, the 10-year yield hit 4.8%. That was its highest level since early 2025. And then two days later, yields came down on the news that one of the Fed governors suggested that he might support holding interest rates steady. So that was yesterday. And then today, we got a much stronger than expected jobs report. And both the two-year and the 10-year yields climbed back up. So we're seeing some volatility where treasury yields on the two-year and the 10-year are reacting to guesses that people are making about what the Fed is going to do at their September meeting and guesses, especially for the 10-year, guesses that people are making about what the inflation situation is going to look like in the next decade.

22:04Right now, the markets are pricing in a 60 % probability that the Fed will raise interest rates at their next meeting. And that meeting is going to be held on September 15th and 16th, and they're going to make the announcement on Wednesday the 16th. So basically, if investors think that the Fed is going to raise rates, then the two-year yield tends to rise. And the reason that we've been seeing a lot of volatility is because we've been seeing conflicting signals. Because on one hand, economic growth and job growth has been a little bit uneven, and some of these labor reports have caught people by surprise.

22:41On the other hand, inflation is way above the Fed's 2 % target. Energy prices are up. The labor market seems to be strong, stronger than expected. The Fed chair, Kevin Warsh, he made remarks in Jackson Hole in which he signaled that the Fed is not done fighting inflation, that the Fed is still very much fighting inflation. And so that's why the two-year treasury yield keeps climbing. And then the 10-year, the 10-year looks beyond what the Fed's going to do at its next meeting. The 10-year says, you know what, if I'm going to lend money to the government for the next decade, I need to know that inflation is going to be under control.

23:22And the simplest explanation for this is like if you're loaning money to somebody, let's say you loan money to someone for 10 years at a 3 % interest rate, but inflation averages 4%, well, if that happens, then you get screwed. Heck, look at the banks, loaned a whole bunch of money at 2 % or 3 % for mortgages, and then in 2022, inflation peaked at 9%. Inflation ran way ahead of the cost of those fixed-rate mortgages, which means the banks who are holding onto those loans got screwed. Inflation is really, really bad for lenders who have issued fixed rate loans. And so that's why investors are saying, look, if you're asking me to lock up my money for 10 years at a fixed rate, then I need to be compensated for the risk that my money is going to lose purchasing power.

24:17And that's why inflation worries cause these yields to climb, especially these long-term yields. And the longer the term, the more sensitive that bond is to that risk. So where does all of this lead us? Well, let's take a look at the recent performance of treasuries that have maturity dates that are 15 years or more. The 10-year rolling annualized returns for those treasuries is negative 2%. Okay, so what does that mean? It means 10 years ago, if you bought a treasury that had a maturity of 15 years out or more, your ability to sell that on the secondary market, I mean, you can hold it to maturity if you want to, but your ability to sell that is pretty abysmal because long-term treasuries now are paying a much higher yield than they were back then.

25:18So anyone who wants to buy a long-term treasury would just go ahead and buy one at today's rates, right? So if you bought one 10 years ago or nine years ago or eight years ago and you want to sell it to offload it, well, you're going to have to discount it. And so that's why the 10-year return for long-term U.S. treasuries, long-term defined as a maturity of 15 years or more, that 10-year return, the rolling annualized return, is negative 2%. And to illustrate how historically abnormal that is, that is the worst long-run performance for long-term treasuries in about 100 years. What this illustrates, first of all, it really does not bode well for inflation worries.

26:06But beyond that, it also illustrates that in the bond world, risk exists along all of these different dimensions. and treasuries, which historically, like 10 years ago, everybody wanted to buy treasuries because the risk, you know, they're considered safe. The risk of default is more or less non-existent of anything in the world. The U.S. Treasury is not going to default on its debt. That's why it's considered so safe. But a bond can be really safe from default, but still very risky in terms of its market value, right? And if inflation is high, then that means that bond can produce a really terrible return.

26:52Now, again, I'm not trying to scare people away from bonds. You can always hold it to maturity. But if you want to sell out of some bonds, well, if those yields climb, then the prices are going to drop. That's where the bad returns come from. I don't want to belabor the point, but I just want people to understand how it works, right? If you loan the government$1 ,000 and they promise to pay you 3 % interest, and after that, interest rates rise, and suddenly the government is issuing brand new bonds that are paying 5%, so nobody is going to want to buy your old bond, the one that pays 3%. they're not going to want to buy that for$1 ,000.

27:34They're only going to want to buy that if you sell it to them for less than$1 ,000. So like, sure, the treasury is not going to default. The government will pay you back. But the market value of your bond has fallen. And if you own a bond fund or a bond ETF, remember, that thing is constantly holding and trading bonds. so you can see losses in a bond fund or in a bond ETF. That's why you don't want to say, you know, there are people who are like, well, I'm, you know, 60-40 stocks bonds, and the bonds are considered the quote-unquote safe part. You know, where people say, like, as you get more conservative, you buy more bonds.

28:15No, bonds are risky. I mean, if you hold them to maturity, you have a pretty good idea of the principal that you're going to get back in nominal dollars, although those nominal dollars, the purchasing power of that will be eroded if there's high inflation. But long-term treasury bonds have, like I said, over the last decade, they've had their worst performance in roughly 100 years. And that is in large part because worries about the deficit and worries about inflation are really, really high. And notice that everything that we've talked about is independent of what the stock market is doing. And so the old adage of like, well, stocks and bonds are inversely correlated and, you know, they're not.

29:00They're just not. 2022 is a prime example. So stocks can fall and long-term bonds can fall, and sometimes they can fall at the same time. you might have a portfolio that looks quote-unquote conservative on paper, and the whole thing can still have a pretty gnarly drawdown. And something like a long-term treasury, a 30-year treasury, or even a 20-year treasury, a long-term treasury can be surprisingly volatile, even though the US government is a very safe borrower. Even though you don't have default risk, you do still have market pricing risk. When you take a step back, like the big so what here, it's not like, oh, treasury yields are high.

29:43Like that's not the big so what. The big so what is that right now the bond market is demanding a much higher price for risk. And it used to be that we lived in a world where people's assumption was like pre-pandemic, the assumption was, oh, oh, cool, the U.S. government is safe and inflation is low and interest rates are low and there's huge global demand for treasuries, right? And long-term bonds felt very, very safe. That's not the world we live in. I mean, it never was. It was an illusion even back then. But now what we understand is that investors are really thinking about, all right, what happens if inflation stays high or climbs higher?