Treasury Selloff Deepens (Despite Benign PCE Print) as Term Premium and AI Debt Supply Dominate

By the Curmudgeon

Introduction:

The Bureau of Economic Analysis (BEA) released the August personal consumption expenditures (PCE) price index data and the third estimate of second-quarter gross domestic product.  Highlights:

·        Headline YoY PCE: +3.4%, on par with revised +3.4% in July.

·        Headline MoM PCE: +0.3%, higher than revised +0.1% in July.

·        Core YoY PCE: +3%, same as revised +3% in July.

·        Core MoM PCE: +0.2%, higher than revised +0.1% in July.

·        Third estimate of second-quarter GDP: +2.2%, above the second estimate of +1.5%.

A separate report from the Conference Board showed U.S. consumer confidence plunged to a nearly 12-1/2-year low in September, with households expecting a deterioration in business and labor market conditions over the next six months amid the Iran war and ​rising interest rates.  Note that consumer confidence dictates future consumer spending, which comprises ~ 70% of U.S. GDP.

ΰOne would think that the very weak confidence report, combined with the lower than expected PCI print would be bullish for bonds?

U.S. Notes & Bonds Decline Further:

The continued steep selloff in U.S. Treasury notes and bonds, despite a milder-than-expected Personal Consumption Expenditures (PCE) inflation report, highlights a classic market phenomenon: macro-economic concerns are overshadowing temporary inflation relief.

While August Core PCE slowed to 3.0% (below the 3.3% forecast), the initial bond market rally quickly faded, driving the 10-year Treasury yield up to 5.306%—its highest intraday level since Spring of 2002.  It closed at 5.29% today (Sept 30, 2026).  The chart below shows the extremely steep rise in the 10-year T-note yield, which comes despite subdued inflation reports.


For comparison, the highest intraday yield for the 10-year U.S. Treasury note in June 2007 was 5.303%, recorded on June 12, 2007.

According to Tradeweb data reported by the Wall Street Journal, that 5.303% peak held as the cycle high for the entire pre-Great Recession era. It was finally breached just today when the 10-year Treasury note hit an intraday high of 5.306%.

Longer-dated US Treasury yields rose even higher today, with the 30-year T-bond hitting ‌5.6206%, its highest since June 2002. The yield on the benchmark 10-year Treasury bond climbed to 5.293% — its highest level since June 2007.

This Dashboard provides an insight into the bond market crash:

 

Indicator

Why it matters

What it would establish

2-year Treasury yield

Market pricing of the expected Fed policy path

Whether the selloff was primarily long-end or broad-based

2s10s and 5s30s curve changes

Curve-shape diagnosis

 

Whether the move was bear steepening, bear flattening, or a parallel selloff

10-year real yield

Growth and real-rate repricing

Whether higher nominal yields reflect real rates rather than inflation compensation

5-year/5-year forward inflation swap or 10-year breakeven

Longer-term inflation compensation

Whether the market is repricing persistent inflation risk

ACM or New York Fed term-premium estimate

Duration-risk compensation

Whether term premium is the central explanatory factor

Treasury auction tails and bid-to-cover ratios

Demand for new government duration

Whether supply is meeting weaker marginal demand

Investment-grade corporate issuance and concessions

Private-duration supply and demand

Whether AI-linked corporate borrowing is pressuring the long end

Oil forward curve, not only spot Brent

Persistence of energy shock

Whether the market expects an enduring supply shock rather than a temporary spike

Source: Perplexity.ai

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What’s Driving the U.S. & Global Bond Selloff/Major Bear Market:

Author’s Note: We explained this here, so this section is an update.

The primary catalysts sustaining this intense selling pressure include:

1. Surging Energy Costs and Geopolitical Strain:

• Oil Shock: Brent crude has surged above $103–$106 per barrel, driven by the ongoing US-Israeli war with Iran and the closure of the critical Strait of Hormuz.

• Long-Term Inflation Risk: Even though core inflation dropped today, bond investors worry that sustained, triple-digit oil prices will eventually filter through to broader consumer costs, forcing the Federal Reserve to keep interest rates elevated for a longer period.

2. Robust Economic Growth Data:

• Strong GDP Output: Alongside the PCE print, revised output indicators revealed that the U.S. economy ran significantly stronger in Q2 (+2.2%) than previously estimated (+1.5%).

• Business and AI Spending: Upbeat manufacturing and business spending indicators—fueled by historic investments in Artificial Intelligence infrastructure—demonstrate that higher borrowing costs are failing to slow economic growth.

3. Severe Fiscal Pressures and Budget Deficit Concerns:

• Glut of Issuance: Global bond markets are buckling under a heavy supply of new government debt and deteriorating national finances.

• Rising Real Rates: Investors are increasingly demanding higher term premiums (compensation) to hold long-term US sovereign debt, overwhelming any short-term relief from economic indicators.

4.  A massive supply shock of hyperscalers borrowing is directly crowding out U.S. Treasuries.

The massive shift from cash-funded to debt-funded AI infrastructure is another huge driver behind the global bond selloff and the spike in yields.

Historically, Big Tech was "asset-light," averaging just $35 billion in annual debt issuance from 2020 to 2024. The massive capital requirements of AI data centers completely reversed this trend.

• Annual bond issuance from the top five hyperscalers (Alphabet, Amazon, Meta, Microsoft, and Oracle) surged to $93–$108 billion in 2025.  Goldman Sachs estimates hyperscalers debt issuance from those five tech giants will reach $250 billion for the full year 2026, climbing to $400 billion in 2027.


• Hyperscalers are issuing massive, long-dated debt—including Alphabet’s recent $31.51 billion global bond offering containing rare 100-year maturities—to match the lifespan of power infrastructure. This duration competes directly with long-term U.S. Treasuries.

• The Broader Ecosystem: When factoring in chipmakers, data center developers, and power utilities, total annual AI-adjacent bond issuance is projected to hit $300 billion to $570 billion in 2026.

Conclusions:

The September 30th U.S. Treasury note/bond price action, despite softer inflation data, was a warning that the Treasury market is demanding greater compensation for duration risk. A one-month downside surprise in core PCE may influence the Fed’s near-term reaction function, but it is unlikely to reverse a long-end repricing driven by oil-related inflation uncertainty, firmer-than-expected activity, elevated public borrowing, and especially rising private-sector (mostly hyperscalers) demand for long-dated capital to finance AI buildouts.

For fixed income investors (like the Curmudgeon), the critical question is no longer whether inflation is declining month to month. It is whether nominal yields have risen enough to clear the combined supply of Treasury and corporate duration without a further increase in term premium.

Cartoon of the Day (courtesy of Hedgeye):


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Wishing you good health, success and good luck. Till next time……..


The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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