The CIO Group blog

Everyone Hates Bonds. That’s a Mistake.

social@ciogroup.com (Steven Wieting & David Bailin) — Thu, 17 Sep 2026 15:29:02 GMT

Everyone hates bonds. No one will add duration to bond portfolios.

Fixed income markets are poised to deliver a negative return this year for the first time since 2022. Yet, forward real returns have improved, particularly for high grade bonds.
US Treasury yields have risen about 100 basis points across all maturities since the start of 2026. Foreign rates are about 90 basis points higher.
The Fed’s new resolve to fight inflation driven by an external energy shock is a major change in policy. Core inflation has been gradually slowing.
Energy shocks don’t take place every year. Yet US rates have risen across all maturities into the distant future.
We don’t see a peak in the US or global economy or profits soon. Yet the S&P 500 dividend yield hasn’t budged from 1% even as long-term Treasury yields have risen from 4% to 5% this year.
As the AI-related profit boom matures and finally subsides or busts, long-duration Treasuries are the only major asset class that deliver consistently high returns during severe equity bear markets. By comparison, high yield bonds have a 60% positive correlation to equities.
We are focusing presently on short duration fixed income (including floating rate debt) plus high yield credit. The future, however, portends a shift toward higher grade, longer-duration bonds, likely in 2027.

Listen Closely to Fed Chair Warsh (July 29th)

“Some of the increases in market interest rates (since the last) FOMC meeting are among the most significant in the last two decades, ranking around the top decile or so.…The markets have done quite a bit.”

Interpretation: Perhaps Warsh is saying that markets have done the tightening for him, excusing his lack of action until yesterday.

Fed Chair Warsh at September 16 FOMC

“Today’s decision removes a dose of accommodation”

Interpretation: Does Warsh think Wednesday’s action was just a mere dose?

“What’s changed since the last FOMC meeting? Geopolitics. I mean, there’s no hiding from hot spots around the world.”

Interpretation: Now the Fed views supply shocks are reasons to raise rates. What’s next? Tightening on the next pandemic?

Everyone Hates Bonds. That’s a Mistake.

We think that the Chair’s view that the Fed was not vigilant and lacked inflation-fighting credibility is a strong driver of bond market performance.

While there have been vast flows into both equities and short-term cash-like securities this year, the net short position in long-duration Treasury futures is nearing a record high. Ironically, it is these very bonds that deliver strong returns when risk assets have retrenched sharply (see figure 1).

The US market has been completely repriced. Yields are about 100 basis points better even after compensating for inflation (see figure 2). We could only wish future equity returns could improve so much, so fast.

Where Investors Have it Wrong

We are not bearish “bond ghouls” who always see disaster for the economy just ahead. Our own equity allocation at CIO group is neutral (fully invested, but not overweight) after a modest reduction at end of August. And we did not place investor money in long-term bonds recently, having chosen floating rate assets that sustain and grow yield as the Fed hikes rates.

Yet as we watch investor behavior, we see US 10-year note net short positions nearing a record high even as yields rise (see figure 3). In short, investors have dismissed the growing value of higher rates for long duration bonds.

Worried Higher Rates are Abnormal? Far From It

Yields near 5% for 10-Year US Treasuries are not unusually high, unless you compare them to the Covid period or the years after the Global Financial Crisis. The rise in yield is still closer to a “normalization,” unwinding the unusually low yields of the past two decades. Yet bull and bear market psychology - chasing strong performance, shunning value, will likely trip up many investors over the coming few years.

Why Are Yields Rising?

Fed Chair Warsh’s decision to actively push down inflation with policy action is under-appreciated in this year’s bond rout. As figure 4 shows, either core inflation, or the new Fed Chair’s preferred “trimmed mean” indicator, shows that inflation is falling slowly and consistently. Yet in his view, current policy rates (and the Fed’s balance sheet) are not positioned to hasten a swift enough return to “2%” inflation.

Shocks, driven by tariffs, trade wars and real wars – all actions taken by the US -- are inflationary. Spiking energy costs have worsened the overall picture. In short, it is policy action that has put the economy and price stability at risk, not the Fed or the current rate levels.

As Warsh noted in his previous (July) press conference, yields have risen across all maturities this year. This means higher bond returns (from current price levels) well after today’s shocks pass. It means greater income for today’s bond holders if and when new inflation shocks occur.

Aren’t Deficits the Main Threat?

This year’s roughly $2 trillion in US net borrowing - about 6.2% of GDP - is the unfortunate result of failing to align growing Federal entitlement expenditures (such as social security and Medicare payments) with tax receipts (see our Point of three weeks ago for discussion).

The future US budget deficit outlook remains bleak without bipartisan scope for action. Yet, the budget deficit this year differs little from Congressional Budget Office projections made a year ago. Only the repayment of tariffs - deemed illegal by the Supreme Court - has grown the deficit more than projected. And as for corporate borrowing, overall debt growth is moderate. Only AI spending seems atypical and extreme.

The Index is Worth Understanding

The Bloomberg US Bond Aggregate - let’s call it the “S&P 500 of bonds” - has delivered a negative 1.5% return in 2026. To the extent that yields have risen without a commensurate rise in economic growth, means the Fed and markets are delivering a true tightening of financial conditions.

As yields have risen everywhere, the US dollar has also strengthened marginally.

Note that the value of “rate” assets will deliver more in the future. High yield debt and floating rate debt have generated positive returns this year and we’ve benefited from overweights, protecting value. However, it would be difficult to repeat this performance now that yields have risen significantly (see figure 5).

“Credible Fed, Credible Dollar”

The Fed’s decision to actively fight inflation rather than wait patiently is a positive for the US dollar’s credibility. Despite delegating communication of “dollar policy” to the US Treasury, it is the work of the central bank that preserves the internal and external value of a currency.

The Fed’s decision to act - with markets now pricing in an additional 50 basis points of rate hikes in the coming year - sends a powerful message about the legitimacy of the Fed’s inflation target and the FOMC’s approach to managing it. Tightening with open Presidential opposition is a powerful signal the Fed will act on its Congressional mandate.

For investors in bonds, portfolio pain is front loaded. But portfolio gains in the future beckon. The value of diversification into safer bonds presents itself in the worst of times (see figure 1). History shows such moments are indeed recurring, but investors for the past 15 years may have forgotten what preparedness means.

Important Information

This material has been prepared by CIO Capital Group, LLC (“CIO Group”) for informational purposes only and does not constitute investment advice or an offer to buy or sell any security or the solicitation of an offer to buy any security or investment advisory service. All opinions are subject to change without notice. Past performance is not indicative of future results. Investment returns may vary significantly over time. Indexes are unmanaged, are not available for direct investment, and do not reflect the deduction of fees or expenses. This material has been prepared without regard to the specific investment objectives, financial situation, or particular needs of any individual investor.

CIO Group believes that the information obtained from third party sources contained herein is reliable, but no representation or warranty is made regarding its accuracy or completeness. CIO Group accepts no responsibility or liability (including for indirect, consequential, or incidental damages) for any error, omission, or inaccuracy in such information and for results obtained from its use.

Certain information contained herein constitutes ‘forward-looking statements’ which are based on current expectations, estimates, projections, and beliefs. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Any forecasts, projections, estimates, or market expectations are based on current assumption and should not be considered guarantees of future events or investment results.

References to portfolio positioning, asset allocation, sectors, or investment strategies reflect CIO Group's views as of the date of publication and should not be interpreted as recommendations to purchase or sell any particular security or investment strategy.

Looking for the Negatives Even as Earnings Boom

social@ciogroup.com (Steven Wieting & David Bailin) — Thu, 10 Sep 2026 01:58:55 GMT

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S&P 500 operating profits reached a record $853 billion in 2Q 2026. And we expect new records for corporate profits in the coming year.

Yet, rather than reach new highs, US and global shares have deflated more than 2% over the past month. The drop is technically insignificant so far. But the forces behind the move are notable and are potentially worsening risks to the economic outlook.

The Iran War continues to drive higher oil prices. Inflation remains above target. The Fed is expected to raise rates. And the absence of more good news on the corporate front leaves a vacuum of positives.

For tactical investors, a pullback in equities can be an advantage. For myopic investors, a drop could cause one to make strategic blunders.

On Monday, August 31, CIO Group modestly reduced its global equities allocation in favor of short-term debt securities. The particular asset we chose – floating rate obligations with near-zero duration – yield about 4.9%. Our favored implementation strategy in the broader short-duration universe yields about 5.7%. Yet we should be clear: Equity market pullbacks in both early 2025 and 2026 were buying opportunities we took advantage of. We are likely to do so again.

Fake News: Lowering the Bar

Analysts estimate significantly slower annualized EPS growth between 2Q and 3Q ‘26 (see figure 1). The sharp drop in expected EPS growth (from 34% to 24%) is dubious. Guiding to lower growth allows the mass preponderance of public companies covered by Wall Street to easily “beat” these reduced estimates. In contrast, the longer-term EPS forecasts of the analysts show an upward rather than downward bias. This makes street “estimates” suspect and sometimes nonsense in our view.

Looking more deeply, the Financial and Energy sectors show unusually low expectations for Q3 and we would expect resounding “beats.” There are likely to be other industries that do the same.

Yet only companies that have material negative information are generally obligated to “pre-announce.” This may mean further estimate cuts before reporting in October/November. Therefore, in the absence of “good news” pre-announcements create a negative news bias.

Furthermore, many firms refrain from making share re-purchases ahead of earnings reports to avoid claims of market manipulation. This alone can change the equity market “tone” ahead of earnings.

Rate Hike or Relief? Here Comes the Fed

This coming week, the Fed is expected to begin a modest new tightening cycle (please see last week’s Point for full discussion). After the European Central Bank pushed its key policy rate from 2.25% to 2.50%, US markets became even more confident that the US would do the same (see figure 2). With deliberate ambiguity as Warsh’s policy, global markets are sure to move on the Fed’s action, even though markets are 70% certain of a hike.

Higher Oil Prices Due to Low Oil Inventories and More War

In our Point Broadcast this past week, we focused on the extended conflict in Iran and dwindling strategic oil reserves (see figure 3).

While President Trump predicted “the war is going to end immediately after the (US midterm) election because they can’t hold out any longer,” former presidential advisor Thomas Wright suggested that Iran can readily hold out much longer than rational actors would. Autumn in the Northern Hemisphere provides a very short window of easing demand pressures, yet the fundamental disruptions to wider Middle East oil and gas exports have caused crude oil to hit $109 briefly again.

With central bankers ignoring the fact that higher inflation is due to external shocks, a regime shift has occurred in the bond market this year. Higher yields and oil prices are now closely correlated (see figure 4). This means interest rates and energy costs may jointly increase pressure on US households.

Oil, Oil Everywhere but Not Enough in Tanks

The world has adapted remarkably to a record supply disruption in part by an unsustainable drawdown of strategic reserves. While the Straits of Hormuz are unlikely to allow Gulf Country exports to achieve prior levels, alternative Saudi export routes and new routes from the UAE and others will lower the strategic importance of the Straits over time. This may even become a catalyst for a negotiated settlement of hostilities. Therefore, we do not think higher sustained oil prices are a certainty.

That said, we are not lowering our investment allocations to “supply chain diversifiers” such as US export terminals and energy asset gatherers. Similarly, despite wobbles, we believe a bull market in defense deterrents is unfortunately a new and lasting fixture of the global outlook.

Important Information

What Tighter Monetary Policy Will Mean For a Growing Economy

social@ciogroup.com (Steven Wieting & David Bailin) — Mon, 07 Sep 2026 19:58:48 GMT

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With the news that the US economy added 162,000 jobs in August, the Fed lost another reason to stay on pause. The decline in jobs reported for July was also erased with these upward revisions. And in Warsh’s thinking, the news that inflation slowed over the past two months doesn’t erase a long stretch of inflation above the Fed’s target.

Following Friday’s robust jobs data, Fed funds futures price in a 62% chance of a 25 basis point rate hike on September 16. This would mark the possible start of a new Fed hiking cycle, reversing the modest cuts of 2024-2025. Ironically, the sources of inflation, including Trump-led tariffs, associated trade disruptions and the Iran War will not matter much to Warsh and company.

The fact that Chairman Warsh doesn’t believe the Fed should strongly signal its intentions makes it unlikely markets will price in a high level of certainty about the outcome of the FOMC meeting. Action will “make us believers.”

Fed Hikes Now Will Be Modest…

Markets currently price 50 basis points of hikes to a 4.25% upper rate peak during the year ahead. This seems a modest expectation given the state of inflation and the broader outlook for the economy. (Figure 1.)

A larger “correction” to the Fed’s 2020-2022 policy mistake was already made by former Chair Powell, who hiked US policy rates from near 0% to 5.5% at peak. The Fed’s subsequent decision to ease to 3.5%-3.75% helped preserve the current economic expansion.

The slowdown in post-pandemic inflation was too gradual for Warsh as he outlined at Jackson Hole a week ago (please see last week’s Point).

Higher Rates Do Not Suggest an Immediate Economic Derailment

If Warsh’s Fed hikes rates the President will not be amused. President Trump attempted to fire Powell for failing to cut interest rates further than he did. He installed Fed Governor Miran apparently to drive rate cuts and looked for a time to add additional rate-cut sympathetic officials before nominating Warsh. Future disharmony is a strong possibility.

In our view, history suggests the Fed is unlikely to derail the economy with modest rate hikes from current levels. Rather, it’s the future economy that will eventually send the Fed on a different trajectory.

Not since the Fed deliberately induced recessions in 1980-1982 has a firming of US monetary policy driven a contraction in the economy rapidly. Unlike 1982, the Fed’s policy rate is not 14%, well in excess of the nominal rate of expansion in the economy. And the Fed is not presently restrictive. It has not made cash a more attractive return opportunity than the returns the economy generates.

The Fed is the Economy’s Demand Regulator

Unfortunately, the Fed’s policy rate “catch up” is not the greatest risk to the economy. The key issue is the future course of investment spending, just as it was in the 1990s expansion that ended in 2001 (Figure 3). Investment in IT equipment is directly responsible for driving 40% of US economic growth in the past year. IT’s 65% growth rate for the past 2 ½ years may continue for the coming year but cannot be sustained far longer. With the completion of data centers, spending will certainly fall, perhaps meaningfully in 2028.

At that time, the Fed funds rate may be too high for expansion to endure without rate cuts. So many financial and real economic variables are aligned with this spending. Only a marked broadening of the sources of expansion would prevent a severe economic slowdown at that time.

The Fed cut its policy rate from 6.5% to 1.0% from 2001-2003. Tech-focused investors of the day lost the majority of their portfolios in the tech wreck. We don’t believe events must follow the exact same course. However, investors do need to understand that the Fed did not cause the excessive optimism in tech investments of the time and it didn’t bring about their end. The Fed also did not stop the bubble and bust from occurring with its subsequent rate cuts.

CIO Group’s Portfolio Actions

Today, investors should understand the economy’s strengths and vulnerabilities and take advantage of policy developments. On Monday, August 31, CIO Group raised its allocation to short-duration US fixed income 1% across portfolios, moving US equities lower by an equal amount.

With the US dollar boosted by Fed-related developments, we have stayed modestly underweight non-US equities and now neutrally positioned globally. During a period of future US rate cuts – which are unlikely in the coming year – we would look to adjust up our share of non-USD assets in portfolios.

Important Information

Nvidia and Warsh Speak, Reducing Market Anxieties

social@ciogroup.com (Steven Wieting & David Bailin) — Sun, 30 Aug 2026 12:05:00 GMT

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Nvidia’s shares fell for seven consecutive days (the longest stretch of consecutive losses since 2022), prior to this past week’s earnings-driven rebound. Why? Apprehension over future guidance and the perception that investors might sell on the news.

Data suggest global bond and currency markets have recoiled in apprehension over Fed Chair Warsh’s debut speech at Jackson Hole. Since early this year, they have traded on perceptions of how the new Fed Chair will guide US monetary policy differently from the past. Uncertainty has made a 3% real yield on long dated TIPS attractive.

US equities are entering a period of greater focus on mid-term elections. History shows stronger returns are likely once results are clear.

With all this anxiety, markets will ultimately reflect profits. Nvidia’s results make it clear the AI infrastructure spending boom has not reached its peak. Earnings forecasts for other semiconductor makers and related shares are set for further upward revision.

The true risk for semiconductors and tech hardware is not coming earnings reports, it’s that markets very likely overestimate the share of total US corporate profits they will earn in perpetuity (a near record 30% of US market cap recently).

Why Markets Are Higher

World equity markets have ground higher this year despite a new Middle East conflict, record oil market disruption, a rise in bond yields and a resumption of trade wars. (Canada certainly, China/US possibly). It’s even possible that Congressional results, and more importantly, legislative control, could be disputed in early November.

So why has the value of US equities risen? The simple factor is record high and rising corporate profits. S&P 500 EPS growth in the first half was stronger than 92% of all quarters since WWII. Most cases of 30% or stronger EPS growth came during the initial rebound after an economic contraction, not during mid-cycle periods. Whatever legitimate fears one has – and we consider interest rates among the strongest challenges – high profits have driven higher share prices (see figures 1-2).

Future Profits and Future Appreciation

The drivers of future prices for equities, bonds and broader global assets reflect both known factors and the realization that estimates will be reached (read on).

Warsh: “Applying Discipline”

After months of scathing criticism, Federal Reserve Chair Warsh’s speech at the Kansas City Fed’s symposium was worthy of praise and deserving of a full read by investors. Warsh highlighted the true limitations of forecasts that investors often gloss over. He highlighted the unusual technological challenges for the economy, investors and policymakers in the near future.

Warsh also explained his unusual reticence to forecast the Fed’s future path. “…I believe when policymakers make quasi-commitments on interest rates through the cycle, we inhibit our own freedom to make the right calls when it's time to decide….we should not indulge a regime in which market participants are looking primarily to the Fed for their next trade.”

Yet on the economy, Warsh wasn’t ambiguous. “While this summer's PCE and CPI readings were better than expected, they do not tell me that underlying (inflation) trends have meaningfully improved. We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That's our job, our mandate, and our charge to keep.”

In response to Warsh’s comments Friday, the US dollar rose 0.3% and Fed funds futures market raised the odds of a 25 basis point rate hike on September 16 from 36% to 56%. Yet the broader impact on world financial markets was modest.

After a month of handwringing over Warsh’s harsh inflation warnings coupled with FOMC inaction, markets have been positioning for tougher Fed talk at Jackson Hole. In apprehension, currency traders have been covering short positions in the US dollar and shorting US Treasuries on anticipation of higher rates (see figure 3).

In futures markets, net long positions in the USD and net short-positions in US Treasuries (consistent with higher interest rate expectations) are rising toward the range of historic highs. This is a sign of a “crowded trade” where investors believe the dollar and rates can only go higher, leaving their positions vulnerable to the reverse. In this case, the positioning made it easier for markets to absorb Warsh’s hawkish message.

As we discussed two weeks ago, it is not the Fed’s job to befriend investors. The best long-term outcomes for the US economy may be served with a somewhat restrictive policy during a boom period, even one as narrow as today’s AI boom. This is despite some slowing in the labor market and consumer demand.

Attractive Real Yields

Fundamentally, we think US Treasury investors are now being rewarded with the highest real yields since the late 1990s (see figure 4). Treasury returns have fallen this year, but we would expect long bonds to be a critical defense asset when the AI boom has peaked.

Elections Are Next

While investors face event risk at some level each day, US mid-term elections are a predictable one with months of apprehension ahead.

In the US economy, control of Congress or control of the White House does not dictate economic outcomes. This is even with a level of government intervention in the economy not seen for at least 50 years. But the possibility of political and social disputes over the election results are a new feature of the landscape following the 2016 election. This may cause investors to shy from risk before Tuesday, November 3.

The long history of mid-term election apprehension and relief is shown in figure 5. While the three-month window prior to mid-terms shows only a slightly less positive skew than average for US equity returns, the 90% positive results post election is a convincing statistic. It suggests that political clarity is better for investor psychology than uncertainty.

Of course, actual outcomes varied widely over the decades and were driven by the fundamentals of the time. The returns for the two three-month periods also overlap historically clear seasonal patterns which favor stronger equity returns around the beginning of a new year.

Is a Rise in Profits Enough to Stay Overweight Tech?

Nvidia’s report on the immediate state of AI demand is consistent with overweight tech positions in both hardware and software, with strong results for cyber-security also a standout. As we show in figure 2, if Nvidia’s sales indeed rise 70% in the coming year, estimates for a 48% gain for semiconductor industry EPS next year are highly likely to rise further.

This does not mean EPS will always rise. But it is consistent with our sense that shying away from tech is premature for investors in a tactical time frame. This is despite our belief that investors overestimate the share of total future corporate profits semiconductors and tech hardware will sustain in the longer run (see figure 6).