Twist and Shout

In this week’s note we reconcile our secular bond bear view and asset allocation fixed income underweight with our tactical call initiated two weeks ago for a rally in the back end of the Treasury market:

· Treasury Twist: We view Treasury’s expanded buyback program as more signal than substance: it is not QE or yield curve control, but it may point to a rational shift in issuance toward the belly of the curve. While we remain a secular bond bears given fiscal and inflation dynamics, we still expect benign inflation and growth data to lead to a countertrend rally in long-duration Treasuries.

· Duration Tightening: The Fed’s balance sheet has artificially suppressed term premium, leaving investors undercompensated for taking long-duration risk. The rise in nominal and real rates and the steeper yield curve are broadly consistent with our 2026 outlook, but the next tactical opportunity, long duration, comes from Treasury issuance flexibility, bank regulatory relief, and market overestimation of IG credit supply.

· Jackson Hole: We expect Chairman Warsh to tread carefully if he addresses balance sheet policy at Jackson Hole, especially with Treasury trying to stabilize the long end. The smoothest path to extricating the Fed from fiscal dominance would be bank regulatory relief first, rate cuts toward r*, and only later a shortening of Treasury reinvestment duration, though we doubt he will provide investors with the specificity they want.

· Everyday Low Prices: Walmart and Target’s price reductions reinforce our view that tariff and input-cost pass-through remains limited and that consumers are resisting additional price increases. With retail momentum slowing, business inflation expectations subdued, and price-received measures softening, the last two benign inflation readings are likely to persist through 2H26.

Ironsides on CNBC, Wednesday August 19

• Note: We use Copilot to help us with this summary, but the 3765 words and 16 charts and tables that follow the paywall was authored the old-fashioned way.