Fixed Income News Round-up for Wednesday

Small-business activity lost momentum and consumers became more worried about the labor market, but inflation expectations remained elevated and credit expanded. For fixed income investors, Tuesday’s releases argue for selective duration and an emphasis on quality – not an all-clear for long bonds.

Treasury markets face a mixed growth and inflation signal from the September 8 data.

The lead

Tuesday’s U.S. economic releases delivered a mixed message for the bond market. Small businesses reported weaker sales, profits, hiring plans and capital-spending intentions. Consumers, meanwhile, assigned the highest probability since April 2020 to unemployment rising over the next year. Those are constructive signals for Treasury duration because they point to slower future growth and, eventually, less pressure on the Federal Reserve to keep policy restrictive.

But the inflation side of the picture remained uncomfortable. Small firms’ price-increase plans stayed elevated, households continued to expect inflation well above the Fed’s 2% goal, and expected increases in gasoline, food and rent costs accelerated. Consumer credit also grew faster in July, suggesting household demand has not rolled over.

The Treasury market’s verdict was cautious. On September 8, the 2-year yield closed at 4.39%, the 10-year at 4.80% and the 30-year at 5.25%, according to the Treasury’s constant-maturity curve. Compared with September 4, the 2- and 10-year yields each rose 2 basis points, while the 30-year yield increased 1 basis point. The 2s10s curve remained positively sloped by about 41 basis points.

In other words, the data were soft enough to reinforce downside growth risks, but not soft enough – or disinflationary enough – to trigger a broad bond rally.

September 8 data scorecard

Release	Latest result	Economic signal	Fixed income read-through
NFIB Small Business Optimism, August	98.7, down 1.1 points	Hiring, sales, profits and capex intentions cooled; price pressure persisted	Modestly positive for duration, but sticky pricing limits the dovish signal
New York Fed Survey of Consumer Expectations, August	1-year inflation 3.6%; probability unemployment rises 44.4%	Labor outlook deteriorated while inflation expectations stayed elevated	Supportive for intermediate Treasuries; constructive for TIPS relative to nominal bonds
Federal Reserve Consumer Credit, July	+4.2% annualized; outstanding credit rose $18.1 billion	Borrowing remained resilient, led by nonrevolving credit	Slightly bearish for near-term rate-cut hopes; mixed for consumer credit
Manheim Used Vehicle Value Index, August	208.2; second monthly decline	Used-car prices are easing	Helpful for goods disinflation, but softer collateral values warrant attention in lower-quality auto ABS

Small businesses weaker growth signals, persistent prices

The NFIB Small Business Optimism Index declined 1.1 points in August to 98.7, reversing part of July’s gain but remaining slightly above its 52-year average of 98.0. The details were softer than the headline.

The net share of owners expecting better business conditions fell 5 points to 10%. Plans to increase employment declined 3 points to a net 17%, while actual hiring activity fell 5 points. Capital-expenditure plans slipped 1 point to 24%. A net 9% of firms reported higher nominal sales over the prior three months, a 5-point deterioration, while reported earnings trends fell 3 points to a net negative 19%.

For Treasury investors, that cluster of weaker hiring, sales, profits and investment intentions is more important than the index’s still-average level. If the weakness persists, it should feed into slower payroll growth, less business borrowing and softer demand – all traditionally supportive for short- and intermediate-maturity government bonds.

The complication is inflation. A net 31% of firms reported raising average selling prices and a net 28% planned increases. Both readings were unchanged in August and remained well above their historical averages. Inflation was named the single most important problem by 16% of owners, up 2 points.

That combination is not a straightforward bullish signal for long-duration nominal bonds. It resembles a mild stagflationary mix: cooling real activity without a convincing retreat in pricing pressure. It supports owning some duration as growth insurance, while retaining inflation protection and avoiding an excessive long-end bet.

Consumers more worried about jobs, but still expecting inflation

The New York Fed’s August Survey of Consumer Expectations also split along growth and inflation lines.

Median inflation expectations were unchanged at 3.6% one year ahead and 3.0% five years ahead, while the three-year measure edged down one-tenth to 3.2%. Expected price growth accelerated to 4.6% for gasoline, 5.3% for food and 6.6% for rent. Those figures do not translate mechanically into official inflation, but they show that household inflation psychology remains unsettled.

The labor-market outlook weakened more noticeably. The average perceived probability that unemployment will be higher in one year rose 1.6 percentage points to 44.4%, the highest since April 2020. The perceived probability of finding a new job after losing one slipped to 45.4%.

That deterioration favors the intermediate part of the Treasury curve, which is sensitive to expectations for future Fed policy but carries less term-premium risk than the long end. It also argues for maintaining exposure to Treasury Inflation-Protected Securities. If growth slows while inflation expectations remain sticky, TIPS can provide a more balanced hedge than a concentrated nominal-duration position.

There was a credit warning as well. Consumers said access to credit had worsened, and the average probability of missing a minimum debt payment over the next three months rose 1.2 points to 13.2%. That is not a systemic alarm, but it reinforces the case for quality within consumer asset-backed securities and for caution toward the most subordinated or subprime exposures.

Consumer credit demand remains resilient

Federal Reserve data showed total consumer credit increasing at a 4.2% seasonally adjusted annual rate in July, up from 3.4% in June. Outstanding credit rose by approximately $18.1 billion to $5.186 trillion.

The composition matters. Revolving credit, which includes credit cards, grew at a 2.5% annual rate after a 6.0% gain in June. Nonrevolving credit, which includes auto and student loans, accelerated to 4.8% from 2.5%. This was not a surge in credit-card borrowing; it was a broader increase led by installment-style credit.

For rates investors, resilient borrowing is a modest counterweight to the softer survey data because it suggests consumer demand continues to absorb high financing costs. Credit-card rates averaged 20.94% across all accounts in the second quarter and 22.15% on accounts assessed interest, according to the Fed. Continued credit growth at those rates gives policymakers less reason to rush toward easier policy.

For credit investors, however, the message is more nuanced. Ongoing borrowing supports near-term cash flows and loan production, but high rates – combined with deteriorating credit access and rising self-reported payment risk – could widen the performance gap between prime and subprime consumer collateral.

Used vehicles a small disinflationary offset

Cox Automotive’s Manheim Used Vehicle Value Index fell for a second consecutive month in August to 208.2. Wholesale used-car prices can influence the used-vehicle component of consumer inflation with a lag, making the decline modestly constructive for nominal bonds.

The securitized-credit implication cuts both ways. Gradual vehicle-price normalization can improve affordability and reduce the need for borrowers to finance inflated purchase prices. Faster depreciation, however, can reduce recovery values when borrowers default. That is most relevant to lower-quality auto-loan and auto-lease ABS rather than senior, high-quality structures.

What it means for fixed income investors

Treasuries: The day’s data favor measured exposure to the short and intermediate parts of the curve. The labor and small-business signals improve the case for duration, but persistent price expectations make an aggressive long-bond rally harder to sustain without confirmation from the inflation data.
Yield curve: The 2s10s spread held near positive 41 basis points. A softer labor backdrop could eventually pull front-end yields lower if the Fed eases, while inflation risk, Treasury supply and term premium can keep long yields elevated. That leaves a medium-term steepening bias, but Tuesday alone did not validate a new curve trade.
TIPS: Elevated one- and five-year household inflation expectations, along with rising expected gasoline and rent costs, support keeping a strategic inflation hedge. TIPS may be especially useful for investors adding duration but unwilling to rely entirely on a rapid return to 2% inflation.
Investment-grade and high-yield credit: Investment-grade credit remains the cleaner expression of carry. Small-business profit and sales weakness, coupled with more difficult household credit access, argues against reaching indiscriminately for high-yield spread compression.
Securitized credit: Higher-quality consumer ABS can continue to benefit from income and borrowing resilience. The rise in expected missed payments and the decline in used-vehicle values make collateral selection and structural protection more important, particularly in subprime auto deals.

The next decisive test is inflation. The Producer Price Index is scheduled for September 10, followed by the Consumer Price Index on September 11. Those reports should carry more immediate duration risk than Tuesday’s mixed collection of surveys and credit data.

Bottom line

September 8’s releases strengthened the case that U.S. growth is gradually losing momentum, especially among small businesses and in household labor expectations. Yet consumers are still borrowing, and both firms and households continue to anticipate elevated prices.

For fixed income investors, the appropriate takeaway is balance: add duration selectively, favor higher-quality credit, retain inflation protection and resist treating softer confidence readings as proof that the inflation fight is finished.

Sources

Disclaimer: This material is for informational and educational purposes only and does not constitute investment advice, an offer to sell, or a solicitation to buy any security or investment product. Views are based on information believed reliable as of publication, but accuracy and completeness are not guaranteed. Fixed income securities are subject to interest-rate, inflation, credit, liquidity and market risks; bond prices generally fall when interest rates rise. Investors should consider their objectives, risk tolerance and circumstances and consult a qualified financial professional before making investment decisions.