Fixed Income and Macro Commentary - July 2025
Fixed Income and Macro Commentary - July 2025
Bessent's Demands for the Federal Reserve
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Section 1: Monthly Market Recap
We begin by summarising the monthly movements, from the 1st of July open to the 31st of July close, across a range of stocks, ETFs, and indices. While some are broad market benchmarks, most are directly tied to fixed income markets, and serve as key drivers of market dynamics. All values are quoted in USD. This overview is intended to set the stage for subsequent discussions and analysis.
ETFs
SPY: $617.28 → $631.92, a 2.37% increase MoM.
NVDA (8.07% of SPY): $152.90 → $177.75, a 16.25% increase MoM.
MSFT (7.37% of SPY): $496.47 → $527.97, a 6.34% increase MoM.
AAPL (5.77% of SPY): $207.93 → $207.50, a 0.2% decrease MoM.
RSP: $181.30 → $183.63, a 1.29% increase MoM.
The technology sector makes up 35.29% of the SPY. We see strong MoM growth, though this is driven largely by the top 10 companies by market cap. However, when considering the unweighted SPY components, we see slightly more sluggish behaviour, though not inherently detrimental. This points to more narrow breadth in equity performance, with some of the megacaps and AI-oriented companies potentially masking underlying weakness across broader sectors.
TLT: $87.90 → $86.93, a 1.10% decrease MoM.
TLT tracks the bond price of long duration (20Y+) US treasuries. To summarise, economic uncertainty + volatility, a stagnant Fed, and persistent fiscal supply pressures have pushed yields higher, leading to a decline in TLT. Headwinds remain from both domestic deficits and global bond market pressures, including higher European sovereign yields, and the marked change in BoJ (Bank of Japan) policy - a shift away from YCC (Yield Curve Control) - are keeping the long-end of the curve elevated.
Additional Indices (Housing Market, other Recessionary Indicators/Unemployment Indicators)
30Y Mortgage Rates: 6.67% → 6.72%, an increase of 5bps.
We begin to see an expansion in the housing market only when the 30Y mortgage rate has a 5-handle. We shall test this in Section 3. Combined with the fact that the winter months are predictably slow for home building (incl. renovations), and with elevated mortgage rates, don't expect much housing activity.
NAHB (National Association of Home Builders) Housing Market Index: 33 in July, up 1 point from June (32).
This is a diffusion index, where values above 50 indicate expansion, below 50 indicate contraction, and 50 signals no change. While the latest data shows a modest decrease in the rate of contraction, the housing market remains firmly in a contractionary phase. This could be attributed to elevated mortgage rates, reinforced by persistently high 10Y+ treasury yields, which translate into weaker demand for new construction/infrastructure projects. We test these claims in Section 3. Knock-on effects are evident in construction materials and retail; for instance, Home Depot Inc (HD) was relatively flat ($364.34 → $367.51), increasing only by 0.89% MoM, while real estate ETFs such as XLRE ($41.65 → $41.41) fell, dropping by 0.58% MoM.
July Unemployment Rate: 4.2%, up from 4.1% in June '25.
Adjusting for the smaller labour force size, the effective unemployment rate normalises closer to 5%. This indicates that, while headline numbers appear quite stable, there is certainly underlying softness in the labour market, particularly labour participation, and this is becoming evident.
July CPI: Headline at 2.7% YoY, core at 3.1% YoY.
Momentum remains sticky on the services side, with services less energy services coming in at 3.6% unadjusted YoY, while goods seems largely stagnant - surprise given tariff impositions by the Trump administration. Though, these tariffs can be seen as a one-time tax. Currently, these come into effect on the 1st of August. Hence, August CPI should provide a more accurate depiction of the tariff's true effects. Core remains sticky downwards, which may also be driving Fed stagnation.
Q2 GDP growth: 3% QoQ, vs forecast of 2.5%.
This took many by surprise. Though, the figure should be taken with a pinch of salt, as Q1 came in at -0.5%. Hence, the Q2 number represents more of a reversal from weakness earlier in the year than genuine acceleration in growth.
Notes:
(i) These are all approximate prices, meant to depict a trend as opposed to exact price changes.
(ii) All information is as of 31st July, 2025.
Yield Curve Movement (1st July vs 31st July)
1MO: 4.32% -> 4.49%, an increase of 17bps.
3MO: 4.40% -> 4.41%, an increase of 1bp.
1Y: 3.98% -> 4.10%, an increase of 12bps.
2Y: 3.78% -> 3.94%, an increase of 16bps.
5Y: 3.84% -> 3.96%, an increase of 12bps.
10Y: 4.26% -> 4.37%, an increase of 11bps.
30Y: 4.78% -> 4.89%, an increase of 11bps.
2s10s: 0.48% -> 0.43%, a decrease of 5bps.
3m10s: -0.14% -> -0.04%, an increase of 10bps.
Section 2: The Balancing Act
We now pivot towards the main topic of this commentary. This month, the focus is on Scott Bessent, the US Secretary of the Treasury, and his demands - representative of the broader Trump administration's stance - for the Federal Reserve ("the Fed"). Both Trump and Bessent have repeatedly attempted to pressure the Fed into lowering the Federal Funds rate, sometimes by as much as 300bps, even going so far as to threaten the removal of non-compliant Fed members, including Chair J Powell. The question is, what exactly do they want the Fed to achieve, and what is driving their decision-making? To understand the Trump administration's goals, we need to unpack some of the pressing economic challenges the US is facing.
The United States is grappling with an ever-worsening deficit problem. By the end of July 2025, the US federal deficit stood at $1.6tn, with total federal debt reaching nearly $37tn. The interest burden alone is staggering: in Q2 '25, the government spent roughly $1.2tn on debt interest payments, amounting to nearly 30% of Q2 federal expenses. This cost is further exacerbated by the near 15-year highs in the 10-Y Treasury yields, which have hovered around the 4.25% to 4.5% mark. This is simply unsustainable for the US economy. Thus, Bessent's logic is clear: bringing down the long end of the curve, namely the 10Y, 20Y and 30Y yields, would significantly reduce debt servicing costs, free up fiscal capacity, and help prevent a deficit spiral - tying in with Trump's goal for the US economy to somewhat outgrow the deficit. Beyond this, lower yields help stabilise corporate borrowing costs and improve refinancing conditions. This particularly favours small caps, which are more sensitive to rate changes, and have been finding the economy slightly more unforgiving, having not gotten the same performance as their larger counterparts.
The housing market is another major point of concern. The NAHB Housing Market Index covers three key components; present sales of new single-family homes, expected sales of single-family homes over the next six months, and traffic of prospective buyers of new single-family homes. This has remained in contraction month-over-month since April 2024. July's reading of 33 signals further weakness, with no sign of respite. The drivers are clear: higher Treasury yields at the long-end have pushed 30-year mortgage rates to around 6.7%, a level widely seen as too restrictive to stimulate sufficient demand. Intuition suggests that activity typically rebounds only when the 30-year mortgage rate falls into the 5% range. With the sector entering a seasonally weaker autumn and winter months, the fragility of the market is increasingly evident. This weakness spills over into construction employment, demand for materials, and related retail sectors, with firms including Home Depot, Lowe's and Best Buy facing the brunt of this slowdown. Clearly, the decline of the housing marker amplifies the case for easing long-end yields. The housing market offers great insight into broader economic conditions. Read more on the index here: NAHB Housing Market Index. We shall test these claims in Section 3.
Meanwhile, Bessent is also pushing to raise the Treasury General Account (TGA) balance to $800-850bn by Sepember 2025, or, more realistically, by year-end. This is largely to ensure an adequate liquidity cushion in-case of any shocks or unexpected volatility. As of the 25th of July, the TGA stood at $348bn, meaning substantial issuance would be required to reach that goal. Yet here lies a contradiction: to rebuild the TGA, the Treasury must issue more bonds, increasing supply and therefore pushing yields up. While issued bonds are usually of short-duration, this dynamic works directly against Bessent's aim of lowering yields, across maturities. The trade-off is clear; while a higher TGA provides fiscal flexibility, particularly in the time of tariffs and trade wars, it risks undermining the administration's push to engineer lower borrowing costs. This balancing act forms the crux of the monetary policy debate.
Section 3: Analysis of Yield Curve and Regression Model (NAHB v 10Y)
Clearly, there are multiple angles at play. To incorporate some depth into our analysis, let us introduce some mathematical tools. First, we shall decompose the July yield curve using principal component analysis (PCA), extracting its three core drivers: level, slope and curvature. This will indicate what exactly is causing yield movements across maturities. Next, we shall run a regression model of the NAHB index against the 10Y treasury yield, while also incorporating 30Y mortgage rates and US QoQ GDP growth. The rationale is straightforward; housing sentiment, long-term rates, and economic growth seem intuitively intertwined. Let us test this rigorously.
The above figure tracks daily movements in the yields of treasuries with various maturities. The curve is upward-sloping, but quite flat between the 1Y-5Y. Notably, the short-end of the curve is higher than the belly, with the 1M and 3M yields higher than the 2Y-5Y, depicting inversion at the front/middle, but the long-end (30Y) is higher than the rest. Hence, this suggests that the market is currently pricing in higher short-term rates given a relatively hawkish Fed, lower mid-term rates given rising expectations of dovishness, entering a rate-cut cycle, and then back to higher long-end yields, which factors in term premium, as well as economic uncertainty with a rising deficit, tariff pressures, etc. Hence, this suggests a late-cycle inversion, with greater recessionary pressures and economic fragility looming.
PCA of the July Yield Curve
Break up of PCA Components
The PCA confirms what the raw data has already depicted, but with more structure. The yield curve is divided into three uncorrelated components: PC1- the level, PC2 - the slope, and PC3 - the curvature.
PC1 (Level): All maturities load negatively, and fairly uniformly, suggesting parallel shifts in the curve. This aligns with the July 1st to July 31st data, where yields across the curve shifted upward in a relatively consistent fashion. The first component captures the bulk of the variance (up to 80%), underscoring that level shifts dominate yield curve dynamics.
PC2 (Slope): Loadings are negative at the short end, and positive at the long end. This is indicating potential steepening pressure, where short end yields are more responsive to Fed policy changes, while the long end remains anchored to inflation, unemployment, and growth outlook.
PC3 (Curvature): With the exception of a pronounced positive loading at the 1MO tenor, values are relatively even across maturities. This implies that curvature is less relevant in the current environment.
In short, the PCA conducted highlights that level shifts remain the primary driver of yield curve movements, with slope and curvature playing secondary, though still relevant, roles.
Time Series of PCA Components
This breaks down the drivers of the daily variation in the yield curve.
PC1 (Level): Clearly the most volatile during the July month, suggesting that markets were repricing the entire yield curve across maturities based on economic data, Fed behaviour, etc.
PC2 (Slope): Smaller, yet consistent, oscillations, reflecting modest steepening/flattening adjustments for the most part.
PC3 (Curvature): Subdued, with only a major pick up by the end of the month given the FOMC decision.
NAHB Housing Market Index vs 10Y US Treasury Yield - Regression Model
I shall first cover my methodology. Within the regression model, I incorporated QoQ GDP, 30Y mortgage rates, 10Y treasury yields, and NAHB index values from Jan '00 to Jul '25. Each data point was normalised to monthly observations. To capture potentially lagged dynamics, I shifted all of the independent data points by three months. I also included a 3-month lag of NAHB itself, to test for any autoregression. (Though, I did conduct another run without an autoregression term.) The dependent variable was set to the current NAHB index. I proceeded to run an OLS (Ordinary Least Squares) regression, adjusting the standard errors using the Newey-West corrections to account for autocorrelation and heteroskedasticity in the residuals. Essentially, this is to minimise any unrealistic optimism in correlation.
The results surprised me, at least initially. The 3-month lag of NAHB completely dominates this regression exercise, with a coefficient of 0.9408, and an extremely strong z-statistic. After some thought, this makes sense. NAHB tracks sentiment, not data. Sentiment in the housing market tends to be pessimistic, and sticky, with present conditions heavily reliant on previous ones. The R² value achieved affirms this, coming at nearly 0.87. When performing the regression with the NAHB lag, the fundamentals I included, such as GDP growth, 10Y yields, and mortgage rates, were not statistically significant. Of course, we see for instance that higher yields drag the NAHB lower, but the p-values aren't convincing. This indicates a 3-month lag is either insufficient, or that the macro variables are simply shadowed by past NAHB performance.
In this case, the takeaway is this: (i) NAHB is overwhelmingly autoregressive, and (ii) macro factors may play a role, but their influence is more convoluted, and cannot be captured solely by implementing a fixed-term lag, at least in sentiment indices. This may motivate the use of more complicated models next time - potentially ARIMAX?
When I excluded the 3-month NAHB lag, the data continued to surprise. The only statistically significant driver (p=0.006) of the NAHB index is QoQ GDP growth, where a 1% QoQ increase corresponded to an approximately 3.3-point rise in the index. This does suggest that broader economic momentum does feed into housing sentiment, though with a modest lag. However, neither 10Y yields nor mortgage rates carried explanatory weight, with much larger p-values and wide confidence intervals. Recognise that the overall explanatory power of these results is severely limited. The R² value of roughly 0.18 indicates that these supposedly crucial macro drivers only account for less than a fifth of the variation in housing sentiment. Diagnostics reinforce this claim. The Durbin-Watson statistic of 0.09 illustrates heavy autocorrelation, while the Jarque-Bera statistic of 0.028 suggests non-normality; the residuals do not follow a normal distribution - are in fact skewed. Clearly, the housing market seems to be run by more complex, or endogenous, dynamics than just the fundamentals. Something to ponder.
Section 4: Short-Term Forecast
The data increasingly suggests that a rate cut is imminent. GDP growth is losing momentum, labour market conditions are softening, and political pressure from the Trump administration on the FOMC is all but intensifying. Inflation remains sticky downwards, and tariff threats certainly do not help this cause. Though, we must frame tariffs correctly; they are a one-time tax. They lift the price level when implemented, but CPI only captures month-over-month changes. Once the initial jump is absorbed, it isn't guaranteed that changes in price continue to arbitrarily rise, unless wage pressures or secondary effects sustain it. With this though, what matters more than the data is sentiment. As per the Michigan Consumer Sentiment Index, inflation expectations have jumped consistently since April. Consumers drive the bulk of the economy, and negative sentiment - regardless of data - will stunt GDP growth further, placing pressure on the Fed. Sentiment also seems to drive the housing market. Without some more optimism injected into the economy, the NAHB index will continue to display market contraction.
The real focus is now on the July jobs report. Even if headline job creation appears solid, the composition matters more. If new jobs are concentrated in maintanence-capex sectors such as healthcare, the labour market doesn't provide sufficent growth stimulation. For the economy to reaccelerate, job growth will need to come from growth-capex sectors that push productive capability. Without this shift, the economy, including the housing market for instance, for instance, will remain under pressure.
On the yield curve, I expect the bulk of adjustment to come from level shifts triggered by Fed cuts, as seen in the PCA workings in Section 3. The short end, which is tightly anchored to the Fed Funds rate, will respond quickly. Though, the long end is stickier. For instance, it may require up to 300bps of cuts to bring the 10Y yields down closer to 3%, a dynamic we have seen in past dovish cycles. All things considered, current levels on the 30Y near 5% make long-duration Treasuries compelling, at least considered to its Asian and European counterparts. The carry is attractive, and with Powell's tenure drawing to a close, the Fed embarking on a dovish cycle over the next 18 months doesn't seem out of the ordinary.
We may also see curve steepening begin to play out. As the Fed cuts, the short end will drop sharply, while the long end lags due to inflation expectations, tariff uncertainty, and deficit concerns, amongst other issues. High yields on the long end remain attractive to buyers, particularly pension funds and foreign central banks seeking safety and duration. From a positioning perspective, I remain long duration. My forecast is for yields across maturities to drop sharply over the next year, with a steepener trade looking attractive in the mid-term. If the Fed begins to aggressively cut, the short-end will collapse, while the long-end will stay elevated, until inflation worry is taken care of, and growth data is more definitive. The lag creates a unique opportunity.
Section 5: Forward Calendar
We now look towards August, highlighting a handful of key events that are likely to shape fixed income markets in the weeks ahead, considering current market drivers.
Economic Calendar
Friday, 1st August: US Unemployment Rate and Additional Tariff Implementation
Friday's labour market data will depict whether any initial signs of cracks in employment exist. An unusually large uptick in unemployment, or downward revisions to prior months data will place serious pressure on the FOMC to begin a dovish rate cut, and the pace at which to execute this. Recognise that the FOMC operates with a dual mandate; price stability, as well as labour market strength. The July FOMC has already delivered an unusual amount of dissent, not seen for almost 5 years, and further cracks in the labour market will only embolden their voice; not accounting for the serious pressure the Trump administration is placing on FOMC members. Though, inflation does remain sticky, and tariff uncertainty gives a voice to hawks, who continue to argue that inflationary risks outweight labour softening, and that aggresive cuts can be premature.
Tuesday, 12th August: US CPI Inflation Data (Core/MoM/YoY)
July was the first month where we observed a partial implementation of tariffs, with some implemented from the 15th of July. Bessent has suggested a "one-third, one-third, one-third" distribution of tariff costs - absorbed partially by exporters, partially by domestic producers, and partially passed on to consumers. The July CPI print will provide the first concrete evidence of price changes, and how tariffs are filtering through the economy. Combined with further unemployment data, this will be crucial towards guaging whether the US is sliding towards a potentially stagflationary environment, with an uptick in consumer prices as well as in unemployment.
Friday, 22nd August: Fed Chair J. Powell speech at the Jackson Hole Economic Policy Symposium
There were two dissents, by Governor Michelle Bowman and Governor Christopher Waller, at the July FOMC, which was quite a rarity, highlighting divisions within the Fed not seen in a while. Bowman and Waller were advocating for a 25bp rate cut, while the rest of the members decided to keep the rate unchanged. This makes Powell's keynote speech at Jackson Hole pivotal. Markets will be looking for clarity on the Fed's mindset for balancing tariff-driven price pressures against a potentially weakening labour market. Hence, there may be heightened volatility in the run-up to the 22nd, as institutions look to position carefully ahead of potential policy signals.
Bond/Treasury/Note Auctions:
Bond auctions in August will provide another datapoint on market sentiment, particularly at the long end of the curve, where Fed policy influence wanes. The short end of the curve remains largely anchored to the Fed’s effective funds rate, but the 10Y, 20Y and 30Y bonds moreso reflect overall economic sentiment. These auctions will test whether investors are willing to overcome potential increased short-term volatility and essentially continue to put faith into the US economy on the backdrop of rising deficits, tariff and inflation uncertainty. This is alongside a weakening dollar, and with other commodities looking particularly attractive although slightly overpriced, such as Copper and Gold.
UST 10Y auction on the 6th of August.
Previous: 4.362%
UST 30Y auction on the 7th of August.
Previous: 4.889%
UST 20Y auction on the 20th of August.
Previous: 4.935%
Strong demand in these auctions would suggest investors still view US treasuries as a safe haven despite everything. Though, weak bidding will only place more upward pressure on long-duration yields, making the Fed’s, as well as Bessent’s, work cut out.
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