While an upward-sloping Treasury yield curve remains a constructive signal of economic resilience and relatively low unemployment, the absolute level of yields is becoming harder to ignore. In other words, the curve may be pointing to economic strength. Our technical gauges remain cautiously optimistic—disciplined, fully invested, and watching the data rather than the headlines for now.
The Fed has more room to wait after this week’s data. The bond market offered considerably less relief. Softer inflation and a weak September payroll report pushed expectations for another October rate hike sharply lower. Yet, long-term Treasury yields still finished the week higher and briefly reached levels not seen since 2002. Stocks welcomed the prospect of a pause on Friday, but one message stood out: removing one near-term hike does not remove the forces keeping long-term borrowing costs elevated.
The Weekly Scoreboard
Friday’s rally repaired some of the week’s losses, but not all. The S&P 500 fell 0.27% for the week and the Dow lost 1.26%, while the Nasdaq gained 0.45%. The Russell 2000 finished roughly 0.2% lower despite a 0.9% gain Friday.
Breadth improved Friday, with advancers outnumbering decliners on both the NYSE and Nasdaq. Even so, new lows remained prominent: the S&P 500 recorded 20 new 52-week lows against 11 new highs, while the Nasdaq posted 224 new lows and 57 new highs. The major indexes still looked healthier than much of the market underneath them.
Treasuries showed a sharper divergence. From Friday to Friday, the two-year yield rose just 2 basis points to 4.83%, while the 10-year climbed 11 basis points to 5.28% and the 30-year rose 14 basis points to 5.63%. Both long maturities reached their highest levels since 2002 during the week. Gold fell about 3.4% as elevated yields and a stronger dollar continued to weigh on the metal.
The Fed Can Wait. Inflation Cannot Be Declared Finished.
August PCE inflation came in better than feared. Headline prices rose 0.3% for the month and 3.4% from a year earlier, while core PCE increased 0.2% and 3.0%, respectively. Real consumer spending still rose 0.6%, showing that cooler inflation did not come with a sharp pullback in demand.
Friday’s employment report gave the Fed another reason to be patient. Payrolls rose only 29,000 in September versus the 90,000 economists expected, while a combined 60,000 jobs were were revised down for July and August. Unemployment edged up to 4.2%, labor-force participation increased to 61.8%, and annual wage growth slowed to 3.0%.
The report still deserves some caution. A relatively late Labor Day may have distorted September payrolls, while jobless claims remain low. The labor market looks more like a slow-hiring, low-layoff environment than the start of a sharp contraction.
Markets nevertheless repriced the near-term Fed path. By Friday, the probability of an October hike had fallen to 22.7%, from 64.2% a week earlier. But inflation pressure has not disappeared. The ISM manufacturing prices-paid index jumped to 77.9 from 71.1. The Fed now has more room to wait, but little reason to declare victory.
AI Spending Keeps Running
Micron provided another strong signal that demand for AI infrastructure remains healthy. Fiscal fourth-quarter revenue reached $54.23 billion, more than four times the year-earlier level, while the company forecast roughly $61.5 billion of revenue for the current quarter. Long-term customer commitments increased from $22 billion in June to $32 billion, and Micron said agreements already cover most of its 2027 high-bandwidth-memory output. CEO Sanjay Mehrotra didn't hedge on what's driving it, telling investors the company doesn't have "line of sight" into when memory supply will catch up with AI-driven demand — that's a company that's sold out through the decade. For a market trying to decide whether the AI trade is a bubble or a buildout, Micron just handed it two more years of receipts. It also explains why the Nasdaq could shrug off a 24-year high in bond yields this week.
That strength helps explain why technology shares continue to hold up better than much of the broader market – PHLX Semiconductor posted a weekly gain of 3.69%. But the AI buildout also requires enormous amounts of equipment and capital. Corporate borrowing tied to AI expansion is one of several sources of demand for long-term funding. AI spending can therefore support earnings while also adding, at the margin, to pressure on longer-term borrowing costs.
The Week Ahead
Next week should provide a clearer view of whether the Fed’s September hike was meant to begin a steady tightening path or something more cautious. Minutes from that meeting arrive Wednesday and could show how strongly policymakers supported additional increases after the first hike in three years. Friday’s jobs report makes that debate more relevant: the case for another immediate move has weakened, but inflation remains above target.
Earnings season also begins to stir, with PepsiCo and Delta Air Lines reporting before the major banks begin the following week. Expectations are already high, with S&P 500 third-quarter earnings projected to rise more than 30% from a year earlier. With long-term yields above 5%, companies now have to show that strong earnings can continue to justify valuations despite a higher cost of capital.
“We cannot affect any individual price, whether it be oil prices, whether it be food stuffs at the grocery store. But what we can do, and will do, is ensure that any change in relative prices don't broaden out. Don't have second and third order effects in the economy”
Something happened on the way to getting my money back
Perspectives By Ben Ashby
Regulation rarely destroys risk. It moves it. After 2008 it moved out of the banks and into private credit, and the banks followed it in through the back door.
Plenty of private credit is perfectly sound lending. The trouble is that the quarterly valuation won't tell you which bits aren't.
Sadly, we British have run this experiment before, with the shadow banks of the 1970s and the Names at Lloyd's. Both times the risk came home, and the last money in paid for it.
What turned 1973 into a crisis was rising rates and an oil shock. Brent is over $100, and the Fed has just raised rates.
As I have observed before, one of Britain's great historical traditions is the financial mess. It's not that we are innately prone to them; we just have a longer history and therefore more opportunity. So, when American friends ask me about private credit, my honest answer is that I have a nagging feeling I've seen this one before, and on our side of the Atlantic it did not end well.
Last October, a committee of the UK Parliament’s Upper House put it to the Governor of the Bank of England that post-2008 rules had "squeezed the balloon, moving risk outside the banking system." He didn't think so. Well, he would say that; he also thought inflation was transitory. The expression Parliament used is an old City adage: squeeze a balloon in one place, and it bulges somewhere else.
Call the bulge a new asset class, produce a reassuring chart, and you can usually charge a management fee for it.
This year, investors in the bulge discovered what "semi-liquid" means. BlackRock's HPS fund was asked for 13.3% of its shares in the second quarter and paid out 5%. Blue Owl's two retail funds were asked for 18.8% and 38.1% and did the same. In September, Morgan Stanley's North Haven fund said it would meet about 44% of each request.
This isn't new on your side of the Atlantic. Before 2008, hedge funds such as D.B. Zwirn did a lot of direct lending while offering periodic liquidity. When Zwirn's clients asked for more than $2 billion back, it shut its main funds in February 2008. Investors wanted their money back in a quarter. The loans took years.
Before anybody panics: a gate is not a default. It's in the prospectus, and it stops those leaving from forcing a fire sale on those who stay. In a market this big, grown this fast, some funds will have serious problems, and plenty will be fine, which is not the same as saying the asset class is rotten. What a gate does tell you is that you can't leave when you want to, and that matters rather a lot when the money is needed for something inconvenient, like living on.
Much Too Much, Much Too Young
Two things filled the balloon. After 2008, Dodd–Frank and Basel III made it expensive for banks to lend to mid-sized, heavily indebted companies, and the borrowers, rather inconsiderately, didn't vanish. They went to private credit funds. Then a decade of near-zero rates supplied the money. Walter Bagehot quoted the saying in 1873: "John Bull can stand many things, but he cannot stand two per cent." It turns out Uncle Sam can't either.
Some of what investors bought is exactly what it says on the tin: senior loans to decent companies, with proper covenants, held to maturity. People have done that profitably for decades. But a market that has grown to somewhere between $1.5 and $2 trillion doesn't stay that disciplined:
More interest is paid by adding it to the loan: the share of loans in business development companies (BDCs) paying in kind rose from about 6% to 10% in four years.
Now back to dark tales from the City of London. In the late 1960s, the Bank of England capped how much each bank could lend. The lending didn't stop. As the Bank later admitted, it simply moved to firms outside the rules because they weren't technically banks. These "secondary" banks—what we would now call shadow banks—borrowed short in the money markets and lent long, mostly on property, and when the caps came off in 1971, the boom did the rest.
Then interest rates went from 5% to 13%, an oil shock quadrupled the price of crude, and the money left. The buildings couldn't follow it. By the end of 1973 the Bank of England had launched a rescue it called the Lifeboat. The big UK banks, the very ones the “secondaries” had grown up to get around, soon lent well over £1 billion (about 40% of the sector's capital at the time) to the bailout.
Fifty years on, the banks still haven't really left. In May, the Financial Stability Board counted around $220 billion of bank credit lines to private credit funds, with commercial estimates up to $500 billion. When MFS, a London mortgage lender, collapsed in February amid accusations of fraud and double-pledged collateral, Barclays turned out to be owed about £500 million, and America’s own Jefferies seems to have a $42M loss, though I suspect this will grow. That was our own little omnishambles. We moved the loan. We didn't move it very far.
Pass the Parcel
Our other experiment was at Lloyd's of London. In 1970 Lloyd's lowered the wealth requirement for its Names, the individuals who backed its insurance with unlimited personal liability. Membership went from about 6,000 to over 32,000 by 1988. The newcomers took on old liabilities at prices set by insiders, and when the asbestos claims arrived, thousands were ruined. Democratization, 1970s style.
Private credit also needs a steady supply of new money, because the old money wants out. In the first quarter, HPS took in about $840 million from new investors while paying roughly $620 million to leavers. If the valuation is right, nobody loses. If it's too high, newcomers have paid leavers the price the manager set.
Until It Pops
Neither the UK shadow banks nor the Lloyd’s Names were big enough to sink the system on their own. What turned 1973 into a crisis was the backdrop: rates up, oil up, and everything built on cheap money exposed at once.
Private credit is overwhelmingly floating rate, which protects lenders from rising rates right up to the point where borrowers can't pay them. Brent crude was about $105 a barrel last week, half as much again as a year ago, and on September 16, 2026, the Federal Reserve raised rates for the first time since 2023. Nobody is talking about 13%. But the sequence is familiar. Systemic leverage is higher now than in the 1970s, so there is likely a tipping point, but—alas—nobody knows when.
The Financial Stability Board noted in May that private credit "remains untested to a prolonged economic downturn." It may be about to sit the exam. I don't know which of today's funds will turn out to be this cycle's shadow bank, and I suspect their managers don't either.
None of this is a reason to drag clients out the back gate. If the underwriting was careful and the client doesn't need the money, patience may well be rewarded. Bargains will also appear when forced sellers arrive: The hedge fund Saba set out in April to raise a billion dollars for exactly that. But I'd ask three questions:
How much of the income arrives in cash?
What does the nearest listed equivalent trade at?
Can this client really wait several years for this money?
The job is to make sure the ones who can't aren't standing in the queue.
Take it from the British. We have squeezed this balloon before, and it has never once gone down quietly, and it’s a bad way to end a party.
Wikipedia. “Walter Bagehot.” Last updated September 8, 2026.
Disclosures: Ben Ashby is Head of Fixed Income & Foreign Exchange at Rayliant Investment Research (“RIR”), an SEC-registered investment adviser; registration does not imply any level of skill or training. He is employed by Henderson Rowe Limited, an affiliate of RIR, and is also a member of Sowell Management’s OCIO team. Because Mr. Ashby holds roles with both RIR and Sowell, each firm may benefit from the distribution of this material. This material is informational only; it is not investment, tax or legal advice, or an offer or solicitation to buy or sell any security. Views are the author’s as of the publication date and may change. Past performance does not guarantee future results. Third-party data is believed reliable but not guaranteed.
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.
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WEEK AHEAD
October 5-9, 2026
Weekly Market Commentary:
Take It Slow… at the Fed, No Relief in Bonds
The Weekly Scoreboard
The Fed Can Wait. Inflation Cannot Be Declared Finished.
AI Spending Keeps Running
The Week Ahead
Squeezing the Balloon
Something happened on the way to getting my money back
Much Too Much, Much Too Young
Here's One We Made Earlier
Pass the Parcel
Until It Pops
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.