Bond Market and Updates

If you've been following this series, you know I've been tracking three possible paths for the economy: inflation cooling cleanly (disinflation), weak growth alongside stubborn inflation (stagflation), or high government borrowing costs becoming the central problem (fiscal/bond-market stress). This week, several separate threads converged at once — and a surprise ending on Friday added a genuine twist. Let's walk through it in order.

Tuesday, Sept 1 — The bond sell-off goes global

Long-term borrowing costs spiked simultaneously around the world, not just in the U.S.:

• The UK's 30-year borrowing cost hit its highest level since 1998; its 10-year hit levels not seen since the 2008 financial crisis

• Japan's 10-year bond yield hit 3%, a level unseen since 1996

• The U.S. 10-year climbed to its highest since early 2025

Deutsche Bank analysts called it "a global affair," pointing to a weekend flare-up in Middle East tensions as the immediate trigger, layered on a broader worry about government debt levels everywhere. The same day, Eurozone data showed energy inflation surging 14.3% year-over-year — a direct line from oil and conflict to prices on store shelves.

The war itself is now part of the story, not just oil

A widely discussed piece this week made a point we hadn't fully separated out before: it's not only oil prices pushing costs up — war spending itself is adding to government borrowing, and not just in the U.S. Europe, Japan, and South Korea have all ramped up defense spending in response to global tensions. One JPMorgan strategist put it memorably: the world has entered a new set of "forever wars," and that's expensive — for everyone's government budget, not just America's. Another line worth sitting with, from the same strategist: the only truly reliable way to bring long-term bond yields down meaningfully would be a serious recession — a stark reminder that the "fix" nobody wants may be the most effective one.

A quiet, symbolic signal from the Netherlands

The Dutch central bank announced it had moved a portion of its gold reserves from vaults in New York and Ottawa to London between March and August, citing "crisis preparedness" amid global political unrest. Worth being precise here: this wasn't the Dutch pulling out of the dollar or U.S. Treasuries — it was relocating physical gold between longtime allies for logistical reasons (gold in London is easier to trade quickly in a crisis). It's a small, symbolic data point, not a dramatic one — but it fits the broader pattern of institutions quietly preparing for more uncertainty, rather than betting on a resolution anytime soon.

Friday, Sept 4 — The jobs report throws a curveball

Here's where the week took a genuine turn. Economists expected the August jobs report to show a modest gain of around 55,000-65,000 jobs. Instead, the U.S. added 162,000 jobs — nearly three times the forecast — while unemployment held steady at 4.1%.

Normally, a strong jobs number is straightforwardly good news. Not this time. Stock futures actually fell on the news, and Treasury yields jumped further, because a strong labor market removes one of the Fed's main reasons to hold off on raising interest rates. As one research note put it, a stronger jobs report is now being read as a warning sign for higher rates, not a reassurance — a genuine reversal of the old "good news is good news" pattern.

The same day, a well-known economist, Mohamed El-Erian, said he expects the global bond sell-off to continue, and — notably — that the U.S. Treasury's bond buyback program (which we covered back in Part 3) had gone "a step too far." That's a real-time example of two big stories intersecting: strong jobs data and rising skepticism about the Treasury's tools, landing on the same day.

What this means for our three scenarios

This is genuinely a mixed week for your three-scenario framework:

• 🔵 Disinflation takes a further hit. Strong jobs growth makes a Fed rate hike more, not less, likely — the opposite of what disinflation needs.

• 🟠 Stagflation gets more complicated. The "weak growth" half of the stagflation story looked less true this week — jobs came in strong. If the Fed hikes into an economy that's actually still fairly resilient, that's a different, somewhat less severe situation than classic stagflation.

• 🔴 Fiscal/bond-market stress remains the dominant thread. A resilient economy removes any reason for the Fed to ease up, which likely keeps yields elevated or pushes them higher — reinforcing everything we've tracked from Druckenmiller's op-ed through this week's global sell-off and El-Erian's comments.

Updated rough odds: Disinflation ~12%, Stagflation ~33%, Fiscal/bond stress ~55%.

What's next

The weekend brings no major scheduled data (markets are closed), so there's a natural pause before the next big catalysts:

• Mid-September: the next Consumer Price Index (CPI) report, which will show whether inflation is cooling or still sticky heading into the Fed's decision

• September 15-16: the Federal Reserve's next meeting — now higher-stakes than usual, given this week's strong jobs data, new Fed Chair Kevin Warsh's hawkish tone from Jackson Hole, and the global bond market pressure. This is when we'll find out whether all this talk turns into an actual rate hike.

The honest takeaway

This week didn't hand us a clean answer — if anything, it made the picture more layered. A strong economy is generally good news on its own, but in today's specific mix (sticky inflation, a hawkish Fed, a stressed global bond market), even good news is getting read through a more cautious lens. That's worth sitting with: we're in an environment where the usual rules of thumb about what's good or bad news for markets don't cleanly apply anymore.