You Won't Believe What Just Happened in the Bond Market

Jeff Snider · Atlas Financial

Hot headline CPI is a narrow energy shock plus lagging shelter data, not broad inflation; income growth can't sustain it.

Snider argues September's headline acceleration was overwhelmingly an energy shock: gasoline jumped and made up more than half of the monthly increase in the index, and fuel oil rose sharply year over year. The core upside surprise came mostly from shelter, especially owner's equivalent rent, which he says is an imputed measure that can lag actual housing conditions by 12 to 18 months or more. PPI shows cost pressure moving through supply chains, but businesses can only pass those costs on if customers have income, and they don't. Without broad job and income growth, higher oil prices don't create a 1970s-style wage-price spiral. He concludes that the inflation signal is narrow, and that the TIPS market and breakevens show little expectation of persistent generalized inflation.

“It's not broad based acceleration across the entire consumer experience. It is very narrow. It's an energy shock.”at 3:00

Jeff Snider · Atlas Financial

The Fed risks a policy mistake by hiking into a weakening economy; longer-run rates still point lower.

Snider argues the Fed may respond to backward-looking inflation data with another hike, or simply threaten one, which the front end of the curve has to price. He compares this to a Trichet-style mistake: raising rates into an already deteriorating economy. The Fed can keep short rates higher for longer than it should, but it cannot repeal the credit cycle. Over the long run, demand destruction is what matters, because it makes future rate cuts and safe collateral more valuable. The swap market reflects this split. It has priced in the possibility of a near-term Fed move, but the 5- and 10-year swap spreads have not abandoned the expectation of lower rates. He sees the recent pattern as similar to late 2023, before the bond rally began, and calls any hike a temporary detour.

“The FOMC can make a Trichet style mistake by raising rates into an already deteriorating economy. It can push short term rates higher and keep them elevated longer than it should,”at 6:51

Jeff Snider · Atlas Financial

Treasury rally reflects demand destruction and safe-asset demand, not inflation; September technical effects have faded.

Yields spiked after the hot CPI and PPI prints, but the move did not hold: the 10-year closed lower on CPI day and fell to about 5.08% after PPI, and the 2-year dropped to about 4.72%. Snider reads this as the market rejecting the inflation narrative. He attributes the earlier September selloff to three technical effects (seasonal yield drift, quarter-end dealer balance-sheet and repo constraints, and self-reinforcing liquidations), which have now run their course. With those gone, fundamentals are dominating: credit is deteriorating, AI debt is being questioned, and consumers are squeezed by energy and component costs. Safe government bonds therefore look more attractive. The curve's steep-front, flat-back shape and the swap market still pointing to lower longer-term rates support his view that the bond market is positioning for weaker growth and eventual cuts, rather than endorsing the economy.

“This isn't the bond market endorsing the economy. It's the bond market preparing for what policymakers aren't aware of.”at 7:08

Jeff Snider · Atlas Financial

Public credit is cracking: CCC spreads near 1,300bp and leveraged loan prices falling, signalling refinancing stress.

Snider says public credit is showing big cracks, not just private credit. CCC spreads, at least by one index, are nearly at the 1,300bp threshold, meaning investors demand a lot of extra yield to own the weakest corporate borrowers. He reads this as a market doubting whether highly leveraged companies can refinance, repay debt, or avoid restructuring, not as an inflationary credit boom. Leveraged loan prices are also falling, with a senior loan ETF approaching its March energy-shock lows and parts of the loan market near multiyear lows. These borrowers are especially exposed because their loans float, so higher benchmark rates raise interest costs, while weak demand limits revenue to absorb them.

“Public credit and public markets are already starting to show cracks in the foundation, big cracks in the foundation.”at 12:23

Jeff Snider · Atlas Financial

Investors are finally questioning AI infrastructure debt as power and chip costs rise and financing gets harder.

Snider says investors previously treated almost anything tied to AI, including data centers and related infrastructure, as if enthusiasm alone removed ordinary credit risk. He argues that is changing: power is expensive, chips are getting more expensive, and financing is harder to obtain. Debt still has to be serviced from future cash flows, so AI may be the future but debt servicing is the present. He links this to tech equities selling off and AI-related debt being questioned, which he sees as one reason demand for Treasuries as safe assets is rising.

“Now the cost of building that infrastructure is becoming impossible for the market to ignore. Power is expensive. Chips are getting even more expensive. Financing is more and more difficult,”at 13:33

Jeff Snider · Atlas Financial

AI-driven memory chip costs are cutting smartphone volumes; higher prices with lower volume is demand destruction, not inflation.

Snider cites global smartphone shipments falling about 22% year over year in Q3 to roughly 251 million units, after declines of 3% in Q1 and 7% in Q2. He attributes this to AI infrastructure consuming large amounts of memory chips and other components, which raises component costs for handset makers. Rather than pass every increase on while selling the same number of phones, manufacturers cut lower-priced models and focused on premium products. Lower-income buyers responded by buying fewer phones, holding older devices longer, buying used handsets, or leaving the market. He uses this to argue that a supply shock can raise measured prices while weakening the economy underneath, because households can't generate more income to absorb it.

“AI infrastructure is consuming enormous quantities of memory chips and other components. That has pushed component costs in particular higher for handset manufacturers.”at 16:33

Jeff Snider · Atlas Financial

The labor market isn't resilient: payrolls are about 9.7 million short of pre-pandemic trend, with recent gains mostly part-time.

Snider disputes the official view that the labor market is resilient. Payroll growth is at best deeply inadequate relative to the economy's pre-pandemic trend, and the cumulative payroll deficit has reached about 9.7 million jobs. He says this reflects a failure to recover and create the jobs that a real recovery would have produced, not 9.7 million workers being fired. Recent household employment gains are concentrated in part-time work. Goods employment improved somewhat, but he attributes that to panic buying and pulled-forward purchases caused by the energy shock. Businesses are adding temporary shifts and part-time staff rather than committing to permanent hiring, which he sees as a sign that the income base is weak.

“Payroll growth remains at best deeply inadequate relative to the economy's pre pandemic trend. The cumulative payroll deficit has reached a whopping 9,700,000 jobs,”at 18:30

Jeff Snider · Atlas Financial

Consumers are squeezed by energy costs and tighter credit, cutting discretionary spending and weakening corporate cash flow.

Snider argues the economy is not generating the income needed for sustained inflation. Instead, it is being squeezed by higher necessities and tighter credit. Households cut discretionary spending to pay for fuel, which weakens corporate cash flow, makes lenders more cautious, and slows hiring and investment. He says this feedback loop makes safe government bonds more attractive. He also points to a K-shaped pattern in which premium products hold up while lower-income consumers pull back.

“It is instead an economy being squeezed by higher necessities, tighter credit. Consumers cut discretionary spending, corporate cash flow weakens, lenders become more cautious, hiring investments slow further.”at 19:29