What Pushes the T10 to 3.62%?

When I was in middle school, a good buddy of mine had a Michael Jordan t-shirt I envied. It said something to the effect of, “Michael Jordan doesn’t live on planet Earth. He just comes here for practice and games.” I never thought I would ever put another athlete into that category until…

Shohei

That has to be the single greatest performance in a baseball game I’ve ever seen. How is he human? When Babe Ruth is the only comparison, you’re doing something unique. And that was against more…portly…competition.

Kobe’s 81. Tiger winning the US Open by 15. Usain Bolt in Beijing winning by so much the other sprinters aren’t in the frame as he celebrates before the tape. Katie Ledecky winning the gold in Rio by 11 seconds. Tyson/Spinks. The Flu Game.

The Phillies choking against the Dodgers was brutal, but I can take a little bit of solace that it led to one of the most iconic performances in baseball history.

Without sports to care about or eco data releases, I’ve been passing my time catching up on recommended podcasts. One of my teammates has been pestering me about The Promote¹. I don’t know these guys and they seem to focus mostly on NYC/Miami deals, but I appreciate their irreverent and gossipy approach. It has been fun listening to those. And I was a guest for Bradley Dunn’s Industrial Voices pod² where he showed me how a proper host conducts himself…and I’m sure he would add to me to that list above of most iconic performances ever…

“But what are you going to talk about, JP? No sports? No eco data? Isn’t that your entire schtick?”

The federal government might be shut down, but I am deemed essential by The Real Boss™…because Amazon never shuts down!

Last Week This Morning

• 10T: 4.01%
• 2T: 3.46%
• SOFR: 4.30%
• Term SOFR: 4.02%
• Fed Speeches:
  • Fed Paulson: “Given my views on tariffs and inflation, monetary policy should be focused on balancing risks to maximum employment and price stability, which means moving policy towards a more neutral stance.”
  • Fed Chair Powell: “The data we got right after the July meeting showed...the labor market has actually softened pretty considerably and puts us in a situation where the two risks are closer to being in balance.”
  • Fed Collins: “With inflation risks somewhat more contained, but greater downside risks to employment, it seems prudent to normalize policy a bit further this year to support the labor market.”
  • Fed Miran: “To the extent that I think policy is quite restrictive right now, that sets us up to be vulnerable to shocks. If you hit the economy with a shock when policy is very restrictive, the economy will react differently than it would if policy was not as restrictive. I think it’s even more important now than I did a week ago that we move quickly to a more neutral stance.”
  • Fed Kashkari: “On the other hand, if I were to guess which mistake we're more likely making, I think we're more likely betting that the economy is really slowing more than it really is.”
  • Fed Musalem: “I could support a path with an additional reduction in the policy rate if there are further risks to the labor market that emerge, and provided that inflation, the risk to persistence of inflation above target is contained, and provided inflation expectations are expected to remain anchored.”

CPI: We Have a Data Problem

CPI was due on 10/15, which obviously didn’t happen. The BLS recalled some employees so we can get it Thursday, however.

Bloomberg’s Anna Wong wrote a great piece about the bigger issue, which is next month’s CPI. The one we get Thursday needed an employee recall mostly to publish the data, but the collection of data had already occurred. What will the CPI look like next month without the typical collection measures in place?

CPI Integrity Issues

• 40% of CPI data are gathered from online sources. But without human BLS agents to gather and analyze during the full month, online scraping is mitigated
• 60% of CPI data is gathered by field agents. Of this:
  • 70% is phone surveys
  • 30% is in person surveys
  • The housing survey relies entirely on these agent surveys and is the single biggest contributor to the final CPI reading (33%)
    • Even if the federal government opens back up today, two thirds of this survey will be missing in next month’s print
  • All this translates into what statisticians refer to as “sampling error.” I prefer my drill sergeant’s “clusterf*ck.”
• And because CPI is measured as a year over year measure, these sampling errors will distort future readings as well.
• CPI survey data is staggered across 20 cities, only three of which are permanent: NYC, LA, and Chicago. The other 17 rotate every two months, which means Thursday’s data from cities like Dallas, Boston, and DC could be misrepresented.
• Several other CPI items like hotels and airfare are surveyed bi-monthly, which means…oh well, you get the picture.

Thursday we will get a CPI report with more margin of error than usual and that noise could carry forward for the foreseeable future.

That being said, the consensus forecast is a headline number of 3.1% (up from 2.9%) and a m/m of 0.4% (same as last month).

Fed Meeting Next Week

I’m early but given the lack of data, I need stuff to talk about.

The market has a 99% probability of a 25bp cut. If you’re like Mark in Hermosa and want to bet on anything other than that happening, please contact me. And bring your checkbook.

Remember, the Fed’s ideal outcome after the rate decision is absolutely no market reaction. That means they signaled the move appropriately ahead of the actual announcement.

And that means if the market is at 99% for a particular decision and the Fed plans on doing something else, they will send all sorts of signals to shift those probabilities.

This week is a dark period for them, so they can’t say anything themselves. If they believe it’s anything other than 25bps, expect someone like Bill Dudley to write an opinion piece to do the talking for them. You may recall this is exactly what happened last September when the market was expecting 25bps and two days prior to the meeting Dudley wrote something for Bloomberg predicting 50bps³.

Absent this, the Fed is cutting 25bps next week. Book it.

5 and 10 Year Treasury

Last week, the T10 tested 4%, a key 12 month resistance level. Brokers around the country rejoiced!


If you care about fixed rates more than SOFR, you should still be laser focused on the Fed’s rate decisions.

But you should be more focused on 2026 and beyond than whether they cut 25bps or 50bps this year.

What’s the biggest difference between today and last September’s T10 low of 3.62%? Fewer rate hikes in years 5-10. Let’s compare the two.

The bottom is pretty much the same: around 2.80%-ish.

But today’s curve rebounds much more sharply and climbs back above 4% by year 10. Last year’s curve didn’t even hit 3% until year 9.


In order for the T10 to test 3.62%, the market will need to back out hikes in the future. That likely results from some combination of inflation fears calming down, deficit concerns easing, and protracted economic weakness….from say something like credit markets collapsing…

The Week Ahead

Federal government news and anything tariff related should dominate headlines. CPI on Thursday is the main eco print, but markets will need to account for sampling errors.