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* FIEND'S SUPERBEAR MARKET REPORT *

* September 15, 2026 *

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* e-mail: fiendbear@fiendbear.com *

* web address: http://www.fiendbear.com *

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Fiend Commentary
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A Quarter Point Too Late?

Something strange happened in the bond market Monday.

The probability of a Federal Reserve rate hike moved closer to certainty.

And Treasury bonds sold off anyway.

Only a few days ago, a September hike was still basically a coin toss. By Monday the probability had climbed above 90%. Overnight it moved as high as 95%.

Perhaps somebody knows something.

More likely, markets have simply reached the conclusion that Kevin Warsh no longer has much of a choice.

Either way, a quarter-point increase Wednesday has gone from an interesting possibility to something approaching the consensus expectation.

Normally that should provide at least a little comfort to the bond market.

It hasn't.

The 10-year Treasury yield finally broke decisively through 5% Monday and continued higher overnight, reaching levels not seen since 2007. The 30-year is closing in on 5.4%.

That may be the more important story than what Warsh does Wednesday.

What if 25 basis points isn't enough?

The Fed can raise its overnight rate from the current 3.50%-3.75% range to 3.75%-4.00%.

Then what?

Inflation is already running at 3.4%.

Oil is back above $100.

Federal spending continues to grow.

The deficit is approaching $2 trillion for the current fiscal year.

The national debt has passed $40 trillion.

And after ending quantitative tightening last year, the Federal Reserve's balance sheet is no longer shrinking.

A quarter-point hike looks considerably less impressive when viewed against all of that.

The Bond Market Isn't Waiting for Wednesday

Bond investors appear to have already conducted their own FOMC meeting.

They voted for higher rates.

The 10-year moved above 5% even as the probability of a Fed hike surged toward 95%. That is important because the Fed directly controls only the very short end of the interest-rate curve.

Warsh can determine the overnight federal funds rate.

He cannot order investors to lend the government money for 10 or 30 years at a rate they consider inadequate.

Long-term Treasury yields incorporate expectations for future short-term rates, but they also include inflation risk, fiscal risk and something economists call the term premium—the additional return investors demand for locking up their money for a long period of time.

All three are currently working against the Fed.

Inflation isn't back at target.

The supply of Treasury debt keeps growing.

And investors taking a 10- or 30-year risk understandably want to be paid for the possibility that Washington's current fiscal trajectory continues.

The result is 5%.

Treasury Secretary Scott Bessent has already tried to provide some assistance. The Treasury recently tripled one of its long-dated bond buybacks to $6 billion.

The market essentially shrugged.

Six billion dollars sounds impressive until it is compared with a Treasury market approaching $32 trillion and a government that needs to borrow trillions more.

You can scoop a few buckets of water out of the boat.

It doesn't help much if somebody is drilling new holes in the hull.

The Fed May Already Be Behind Again

Yesterday we pointed out how little inflation cushion the Fed actually has.

The current federal funds midpoint is approximately 3.625%.

Headline CPI is 3.4%.

That leaves a simple real policy rate of barely 0.2%.

A quarter-point increase Wednesday would lift the midpoint to approximately 3.875%.

Against today's inflation rate, that sounds somewhat better.

The real rate would rise to roughly 0.5%.

But that calculation assumes inflation stays at 3.4%.

That is becoming a larger assumption by the day.

Brent crude has moved back above $107 and WTI above $103 as attacks on Saudi energy infrastructure and continued disruptions around the Strait of Hormuz once again threaten global supply.

Those prices are now near some of the worst levels seen during this year's Middle East conflict.

Oil does not immediately appear in every component of CPI.

It works its way through the economy.

First gasoline.

Then diesel.

Then trucking.

Then aviation.

Then plastics, chemicals, agriculture and all the other industries that either consume petroleum directly or pay someone else to transport their products.

The August CPI report mostly looked backward.

The Fed has to make policy looking forward.

If sustained $100-plus oil eventually pushes headline inflation toward 4%, the math changes dramatically.

A 3.875% federal funds midpoint against 4% inflation means the simple real rate is negative again.

Warsh could therefore raise rates Wednesday and still end up effectively easing monetary policy if inflation accelerates faster than he tightens.

That would be quite an accomplishment.

One Hike Becomes Two

This also explains why the market has moved beyond Wednesday.

Investors are increasingly pricing additional rate increases after September.

A second quarter-point hike in October would take the target range to 4.00%-4.25%.

That sounds more serious.

But even then, the Fed would merely be returning rates to levels that were considered normal not very long ago while inflation could be moving higher.

This is the danger of falling behind the curve.

The Fed doesn't necessarily have to make a gigantic policy mistake.

It just has to move too slowly.

Inflation rises 0.3%.

The Fed hikes 0.25%.

Oil rises again.

The Fed waits six weeks.

Inflation expectations rise.

The bond market demands another 20 basis points.

Eventually the central bank is moving, but it is always one step behind.

That is what happened during previous inflation cycles.

It is also why bond investors pay so much attention to credibility.

If they believe Warsh will do whatever is necessary, one quarter-point hike might accomplish more than the actual 25 basis points.

If they believe Wednesday is merely a token gesture designed to quiet markets, it may accomplish almost nothing.

So far, the bond market doesn't appear particularly impressed.

QT Is Gone

There is another piece of the monetary puzzle that has received less attention than the federal funds rate.

Quantitative tightening ended last December.

From June 2022 through late 2025, the Fed allowed approximately $2.2 trillion of securities to roll off its balance sheet.

That was monetary tightening too.

The process stopped December 1.

Since then, the Fed has been making what it calls reserve-management purchases to ensure that the banking system maintains ample reserves.

The terminology is technically important.

The market impact is also worth noticing.

By July, the Fed's total assets had risen approximately $189 billion since balance-sheet runoff ended.

The latest Federal Reserve statement puts total assets near $6.74 trillion.

This isn't the giant QE program used during the pandemic, and it would be misleading to describe it that way.

But it also isn't QT.

The Fed is considering raising short-term interest rates at the same time its balance sheet has quietly begun moving in the other direction.

That makes monetary policy considerably harder to summarize with a single number.

Warsh can hike 25 basis points Wednesday.

But the central bank is no longer draining liquidity through balance-sheet runoff.

Fiscal policy is still expansionary.

And oil is injecting a new inflation impulse into the economy.

Monetary restraint is fighting several opponents at once.

Washington Keeps Borrowing

Then there is the federal government.

The August budget numbers didn't exactly provide reassurance.

The fiscal-year deficit through August reached approximately $1.97 trillion.

That is already larger than the entire $1.775 trillion deficit recorded in fiscal 2025—with another month still remaining.

Interest expense is becoming its own problem.

Year-to-date federal interest payments are up about 13%, or roughly $143 billion.

And those numbers were accumulated while much of the government's existing debt was still financed at rates below today's market levels.

Debt has to be refinanced.

When a Treasury security paying 2% matures and is replaced by one yielding 5%, Washington doesn't get to complain that the bond market is being unreasonable.

It pays 5%.

Multiply that process across tens of trillions of dollars and interest expense becomes another rapidly growing federal program—except nobody gets a bridge, a Social Security check or a fighter jet in return.

The money simply services yesterday's borrowing.

Higher rates therefore create an uncomfortable feedback loop.

Government borrowing pushes yields higher.

Higher yields increase interest expense.

Higher interest expense increases the deficit.

A larger deficit requires more borrowing.

More borrowing puts additional pressure on yields.

That is the kind of cycle bond investors notice well before politicians do.

And We Want Another Trillion?

Against this backdrop, President Trump is proposing $5,000 checks for American adults if Republicans retain Congress.

The potential cost has been estimated around $1.35 trillion.

Trump says the government can easily afford it.

The bond market may have a different definition of "easily."

Whether the proposal ever passes Congress isn't really the point.

What matters is the signal.

Washington has accumulated more than $40 trillion of debt, is running a deficit approaching $2 trillion with unemployment near 4%, and is spending roughly one-fifth of federal revenue just servicing the debt.

Yet the political discussion isn't about cutting the deficit.

It is about finding another trillion dollars to distribute.

This is happening while the president simultaneously argues that the United States should have the lowest interest rates in the world.

Lower taxes.

More government spending.

Consumer checks.

Cheap money.

And somehow 2% inflation.

That is quite a recipe.

The Treasury market appears to be sending it back to the kitchen.

Wednesday Gets Politically Interesting

If Warsh raises rates Wednesday, one reaction is almost guaranteed.

It won't come from the bond market.

It will come from the White House.

Trump has repeatedly demanded lower rates and recently said the United States should have the lowest interest rates in the world.

Instead, his handpicked Fed chairman is now on the verge of delivering the first rate hike in three years.

And it comes only weeks before the midterm elections.

That isn't exactly what the White House ordered.

A 25-basis-point hike will immediately raise questions about mortgages, auto loans, credit cards and the economy at precisely the time Trump wants voters thinking about lower costs.

Warsh therefore has an additional problem Powell never faced in quite the same way.

He was chosen in part because the president expected a different Federal Reserve.

Now he may have to demonstrate Fed independence by publicly disappointing the man who appointed him.

The press conference could become more important than the actual hike.

Does Warsh describe the increase as a small insurance move?

Does he emphasize that future decisions remain entirely data dependent?

Or does he acknowledge what the bond market already appears to believe—that inflation risks have changed enough to require a genuine tightening cycle?

The difference could determine whether the 10-year stays near 5% or keeps climbing.

Five Percent Is a Message

The move through 5% matters partly because markets love round numbers.

But there is more to it than psychology.

A 5% Treasury yield competes with almost everything.

Why accept a 3% dividend yield from a volatile stock if the government will pay 5%?

Why stretch to finance another investment property?

Why should a corporation pursue a marginal expansion project if borrowing costs have jumped dramatically?

Why refinance a 3% mortgage to move across town when the new loan approaches 7%?

This is how the bond market tightens financial conditions without waiting for the Federal Reserve.

The effect eventually reaches stocks, housing, commercial real estate, corporate borrowing and consumer spending.

And unlike the federal funds rate, the president cannot pressure Treasury traders into voting differently.

There are millions of them.

The Market May Be Asking for More

That brings us back to Wednesday.

CME says the hike is now virtually certain.

Warsh may deliver the expected 25 basis points.

Stocks may initially celebrate because uncertainty has been removed.

Bonds may even stage a relief rally.

But the more interesting question comes afterward.

What if nothing changes?

What if the 10-year remains above 5%?

What if the 30-year keeps pushing toward 5.5%?

What if oil remains above $100?

What if September CPI moves higher?

Then Wednesday's hike will look less like the beginning of a tightening campaign and more like the Fed finally catching up to where the bond market was several weeks earlier.

Warsh would then face the same problem in October.

Another 25 basis points.

Another meeting.

Another month of inflation.

Another month of government borrowing.

The Fed can move in quarter-point increments.

Inflation, oil and the bond market are under no obligation to do the same.

Yesterday we wondered whether Warsh would finally find the nerve to hike.

Today that almost seems like the easy decision.

The harder question is what happens if he does—and 5% isn't impressed.

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