The Good, the Bad, and the Ugly in the Bond Market

Jeff Buchbinder (00:00):

Hello everyone, and welcome to LPL Market Signals. Jeff Buchbinder here with my friend and colleague, Lawrence Gillum. Lawrence, we are matching today. We are twins. I think we have to start there, although we didn't match on the football field because our teams are going in different directions. How are you?

Lawrence Gillum (00:22):

I'm doing well. Yes. Let's get the awkwardness out of the way at the beginning. We, are wearing the same pullover shirt here, but I think it's stylish, so it works.

Jeff Buchbinder (00:35):

Absolutely. Monday after Labor Day, probably should not be wearing white, but we're going to rebel. We're going to do it. So here are the disclosures. It's September 8, 2025, as we're recording this. It is a little after lunchtime here on the East Coast. We hope everybody enjoyed the, the weekend. Certainly Lawrence, you enjoyed watching your football team the Bucs more than I enjoyed watching my football team the Chiefs, but hey, it's early, a lot of more football to left to be played. Here's our agenda, the market recap. I think it's really impressive that stocks held up as well as they did in the face of that weak jobs number on Friday. So we'll talk about that. Of course, Lawrence being our bond guru, we'll talk about the bond market. You've titled your section "The Good, the Bad, and the Ugly."

Jeff Buchbinder (01:28):

I think I got to think the political uncertainty and the sell-off on the long end of the yield curve has to be the ugly, but correct. I don't know for sure. We didn't pre-plan this, so I'm going to just, I'll let you go through <laugh> where the ugly is. And I think the part of the good is that the bond market's done so well this year. In fact, the Ag I noticed this morning is up 6% year to date. That is a really solid year to date return for the bond market, and it's only September. Next I'll talk about the bull market and try to put it into historical context, because a lot of people might think, well, we've been doing so well, the market is up 30% since April, maybe it's time to roll over. And I get that.

Jeff Buchbinder (02:17):

But if you look at the numbers and compare where we are in this bull market to history, it suggests that we still have legs. So that's what, I'll try to make that case here in the next segment. And then we'll end with a preview of the week ahead. And of course, inflation is the big economic data point this week, even though the Fed is probably locked in at a rate cut of 25 basis points. So market recap first. Again, it's resilient in the face of jobs weakness, I think it's fair to say because the S&P 500 was only down about a quarter of a point on Friday, and that ended up being the decline for the week, about 30 basis points. So not down much. We're up 11% for the year. Very, very good year for stocks still. On the sector front, communication services led, that was in large part because of Alphabet.

Jeff Buchbinder (03:15):

When Google was told they don't have to sell the Chrome browser business, they rallied something like 9%. And that's such a big weight in communication services that that's why you see there, that that sector led. On the downside, you had energy down 3%. Really, the talk of energy has been OPEC increases in production or OPEC+. And I think that's really creating hangover. You also have a little bit of a sell-off in the more cyclical sectors. I think the tariffs have started to weigh a little bit more on some of the companies that we've heard from lately. So you see some weakness from that. And then lastly, the jobs report was so weak, of course, that I think that was really why you saw the weakness in financials. But nonetheless, we're talking about a really small move.

Jeff Buchbinder (04:09):

In fact, I've laughed when I've heard some Wall Street trading desks talk about buying the dip. I mean, this is not a dip yet, <laugh>, it's really not. So I mean, the dollar didn't really move last week. So we had, you know, some decent, but not particularly booming returns, I would say in international markets. The MSCI EAFE developed international benchmark up 0.3%. The MSCI Emerging Market Index up 1.4%. So that was pretty strong. Nice gains in Mexico and nice gains in India helping prop up that index. So again, you know, pretty decent week given the jobs report was so weak on Friday. I'll talk about more about that here in a minute. So Lawrence, turning to the bond market, I mentioned it's such a strong year. It was more than just, I mean, we got almost a year worth of returns <laugh> last week in some years. So talk about the market reaction to the jobs number. Did that surprise you at all?

Lawrence Gillum (05:16):

No. Well, yes and no. And we're going to talk about the reaction. That's part of the good in the bond market section that the rates market did actually perform like it was supposed to do. Like it has historically, despite all the outstanding narratives about debt and deficits that we've talked a lot about. But at the end of the day, the rates market tends to follow the economic data. And the economic data was weaker on Friday as we talked about, unexpectedly so. And that did cause a rally out of the rates market. So we did see a pretty big move lower in yields last week. So the Ag up 90 basis points, up 6% year to date. Keep in mind though some of that is coupon, some of that is price appreciation.

Lawrence Gillum (05:57):

So the rate, the 10-year Treasury yield's about 50 basis points lower now than it was to start the year. So that has certainly helped generate that 6% type return. I don't know how much more legs or how much further we can expect rates to fall from current levels, given our concerns about debt deficits, et cetera. But we will take that 6% year to date thus far. So as it relates to other sectors, a good week broadly across markets. The mortgage-backed securities sector up 1%, up six and a half percent year to date. Investment-grade corporates up about a percent as well. So it's been a pretty broad rally out of the rates market. What was interesting, and we're not showing spreads here, but on Friday, despite the weak job jobs report, high-yield spreads tightened on Friday.

Lawrence Gillum (06:50):

So it's not a reaction that you typically see, but nonetheless, we did see a positive return out of high-yield bonds. Munis have come back to life as well. That'll be the last market I talk about before we move on. But I've been an unbiased cheerleader, I will say, for the muni market given the struggles that it had to start the year given the ongoing supply demand challenges that we've seen in that market. But it has shown some life recently, only about a percent year to date. But over the past couple months, we have seen some the muni market post some pretty positive returns. And importantly, valuations for the muni market remain pretty compelling relative to taxable markets. I still think there's some legs there as well. But all in all, a pretty good week last week, primarily a pretty good day on Friday because of the jobs report. But nonetheless, a good week, good year to date period for a lot of these fixed income markets.

Jeff Buchbinder (07:48):

Love it. You're benefiting from diversification into bonds. You're benefiting from diversification into foreign equities, and even lightly starting to benefit from diversifying into small caps. So turning to commodities real quickly, we see the weakness in the crude oil market again from OPEC+ production increases. So that was down almost 2%. The precious metals market gets a lot of attention when you talk about the Fed. Sure enough, it responded, up 4% last week. That's a big move. And certainly anticipation of rate cuts a part of that. Had a little bit of weakness in the dollar, but really not anything particularly notable. So this continues to be a really good market for precious metals, an area of the commodities complex that we continue to like at LPL Research. All right, so moving on. Here's your S&P 500 chart.

Jeff Buchbinder (08:44):

So I mentioned that the stock market was really resilient in the face of that weak jobs report. In fact, you know, not only was it soft, we're looking at an average three month average job creation around 20,000, but you actually had one month revised to negative, June. And historically, you have to have a negative jobs print before you get a recession. It doesn't necessarily mean that every negative jobs print leads to a recession, but certainly it's one of those boxes that people check. So you, even though the stock market's up today, you're going to see more people talking about recession risk rising because, well, not only are we close to zero, but we actually on a three month moving average. But we actually got a negative, a slight negative in June. But the good news here with this chart is that we're still above the 20-day moving average.

Jeff Buchbinder (09:39):

That is 6,444. The close on Friday was 6,481. We're not really moving much today. And below that, you've got cushion at the 50-day, you've got cushion at the February highs. So, a pullback that gets us below 6,144, the February high, would take a lot. We might do it, in fact, we think the odds favor that happening at some point over the next several months. But it's going to take some more news beyond just what we've been hearing lately, because you got more stimulus coming in 2026, you got a really good earnings foundation, you got a lot of AI investment. So it's going to take something that moves rates up or something that causes recession fears to rise, which of course would mean rates down. So those, the geopolitics don't look like they're enough right now to drive a meaningful pullback.

Jeff Buchbinder (10:39):

We'll see. We still think we're going to get one, could start in September. That's a seasonally weak month, as you all know, I'm sure. Could be a little later. We don't know what's going to cause it, when it's going to come and how deep it's going to be, but certainly we're biased toward a pullback being overdue. So let's turn back to the bond market here, Lawrence, and talk about your good, bad and ugly analogy, and then we'll get back to stocks when we talk about the Weekly Market Commentary and the outlook for the bull market. So we're going to start with the curve shift and certainly you see a little bit of the influence, I think from the jobs report here.

Lawrence Gillum (11:24):

Yeah, that's right. So, the good with regard to the good, bad and ugly, certainly the rates market performed how you would expect it to, given the weak job data that we saw on Friday. What I'm showing here is the entire Treasury yield curve. As we know, Treasury Department issues a lot of different bonds with a lot of different maturities, a lot of different tenors, which by the way was the Wordle word of the day on Sunday. I got that in two guesses, by the way. I don't know if you play Wordle or not, but nice job. Yeah. So, my kids were impressed, but anyway we did have a lower yield curve last week, primarily because of what happened on Friday. So we did see the yield curve move lower by about 10, 15 basis points.

Lawrence Gillum (12:08):

But what was the good part about that was, is that the long end of the curve participated as well, right? So we did see the 10-year, the 20-year, the 30-year tenors move lower on the back of that weak job report, despite concerns about debt and deficit spending, you know, we've spent a lot of time talking about how much issuance is expected to come to the market over the next couple years. And that would likely keep rates elevated. But we also noted that Treasury yields are a combination of growth and inflation expectations. So if the economy started to show signs of softening then we could get lower rates as well. And that seems to be what happened on Friday. So, if the good was that the yield curve was lower bonds participated, they acted like that diversifier despite all the other narratives out there that would suggest that rates are higher for longer. Now, that said, I still think that there's going to be some issues digesting Treasury securities on a go forward basis, but it's just another reminder that Treasury yields tend to follow the economic data.

Jeff Buchbinder (13:13):

Yeah, if the Supreme Court rules that the IEEPA tariffs are illegal and they have to be rebated, that will delay that tariff revenue, it will probably come back, but it'll be delayed. I would guess that that would put some upper pressure on this curve. Is that fair?

Lawrence Gillum (13:30):

That is fair. Yeah. So we've talked, I think I wrote a blog about it a couple weeks ago, but, or we've talked about it, but the bond market needs tariff revenues to offset Treasury issuance. The, you know, the Treasury Department or the U.S. government's running these $2 trillion up, you know, upwards of $2 trillion a year in deficits, that $2 trillion needs to be made up with something. And that hole is filled with Treasury issuance. So until we can come up with ways to either cut spending or increase revenues, you know, there's going to be those deficits there, that means issuance, Treasury issuance will need to continue to increase, but that tariff revenue would help offset some of that deficit spending that we're doing.

Jeff Buchbinder (14:17):

All right, so next up is the Fed. So is this your bad? I think it has to be <laugh>.

Lawrence Gillum (14:37):

But so yeah, so this is the bad and the reason why I put this as the bad is that we've seen this story play out before, the bond market tends to price in pretty aggressive rate cuts only to have those get repriced out over time. So what I'm showing here is the expected fed funds rate at the end of next year. For a while, you know, the market was kind of comfortable around three, 3.2% in terms of an expected neutral rate. We've traded underneath that now. So markets expect the fed funds rate to be about 2.8% by the end of next year, which would be, you know, a decent amount of rate cuts. And importantly, potentially a fed funds rate below the neutral rate, that would suggest that, you know, that things are potentially worse than what we think they are.

Lawrence Gillum (15:37):

So I don't know if this is going to stay as the bad, I guess that it, you know, maybe we don't see a 3% or a fed funds rate below 3% by next year if the economy reaccelerates and you know, and things don't worsen than what we think that they're going to do. So, you know, I put this as bad, but it seems like there's a bit more optimism in the bond market for rate cuts that may not actually come to fruition.

Jeff Buchbinder (16:07):

Yeah, we're used to that, right? Over the last couple of years, there's been a number of periods where the market was pricing in way more cuts than we actually got, and the market handled it okay. I mean, I guess we had a little bit of a tantrum to get us up to 5% on the 10-year yield. But generally speaking, maybe the market can hold up okay under that.

Lawrence Gillum (16:32):

Yeah, we're not back to the same sort of aggressiveness that was back last September when the market had priced in 10 rate cuts before the Fed even cut one time, right? So that's when we got that sell-off in the rates market because of just what was priced in. I don't think we'll see something like that this time around. I just don't know that we're going to get a, you know, a 2.75 to 3% fed funds rate by the end of next year. I mean, we'll see, you know, what the economic data looks like, but it seems a little aggressive at this point.

Jeff Buchbinder (17:00):

Yeah. And again, that stimulus coming in next year with the One Big Beautiful Bill Act is about 0.9% of GDP in 2026. It's going to be really hard to have a recession under those conditions. So sure, you could have recession fears rise this year, especially if we get some more job numbers near zero, I guess there's going to be the big BLS revision this week. So that could cause some folks to sound the alarm bells maybe a little bit louder, but our view is still that we get some economic growth in the second half, and then a re-acceleration, not dramatic, but a re-acceleration in 2026. And that should prevent us from needing the fed funds rate to go to say, two and a half or lower. I guess last thing on this, Lawrence, are you in the majority that thinks we're going to get 25 bps and not 50?

Lawrence Gillum (17:54):

Yeah, I think so. I think there'll be discussions and when we look back at the minute meetings or the, yeah, the meeting minutes two weeks after the September meeting, they'll admit that they discussed the 50 minute or 50 basis point cut. But yeah, I think at the end of the day, they'll go 25 this time, potentially another one in October. But, you know, we do think you know, rate cuts are coming, but it's going to depend on the data, of course,

Jeff Buchbinder (18:23):

Data dependency, no doubt. We will continue to hear that probably even after Powell's gone, we're going to hear some of that, maybe less <laugh>, but they're still going to have to follow the data over there. All right, so next up is the ugly, I think it's fair to say that what's happening in France, Japan, and the U.K. all a little bit ugly.

Lawrence Gillum (18:45):

As well as Argentina, I didn't put that on here either, but Argentina's going through a similar type kind of political instability you know, a period in time where, you know, markets are nervous about debt and deficit spending and really taking that out on the long end of curves. So I'm showing the 30-year bonds, they're all normalized at a hundred to begin the year. But frankly, you can see that whether it's U.K., Germany, Japan, France, long end of curves are selling off because of that fiscal uncertainty. And, you know, it hasn't happened here, despite the narrative the bottom line is the U.S. 30-year, and it's kind of flat on the year. But given what's taken place in Germany and Japan and France, we just got the no confidence vote out of France.

Lawrence Gillum (19:41):

So it looks like they're headed for a third government in a year. And all these countries have one thing in common, and that's deficits and fiscal spend. So I think it's a real risk that that type of shunning of the long bond could come to the U.S. as well. Not, I would argue not to the same extent that we're seeing out of Japan and France and Germany, but you know, I do think that the, you know, the vigilantes, if you will, could show up here in the U.S. and not be big buyers of the 30-year U.S. bond. But it's just been a pretty challenging year for a lot of duration owners out there. If you think about Japan, the 30-year bond is up about a percent this year. If you think, you know, in duration terms, you know, it tends to have like a 30-year duration associated with it. A lot of these investors that own these bonds are down almost 30% this year alone. So, it's just, it's a very challenging environment for a lot of these institutional investors that own these bonds because they're seeing some pretty big market to market losses on their balance sheet right now.

Jeff Buchbinder (20:52):

Yeah, I guess we got a whiff of how painful long bond losses can be in 2022 in the U.S. but, you know, they're experiencing that kind of pain and more this year in some of these markets. I guess we're also, oh, go ahead.

Lawrence Gillum (21:09):

I was going to say, unfortunately, these are things that aren't quick fixes either, right? So when you're running debt to GDP, like Japan is over 200%, and you've got budget deficits like France does in the five, 6%, or even in the U.S., I mean, those aren't things that where you can kind of, you know, snap your fingers and fix overnight. These are going to be long drawn out issues and hopefully this doesn't turn into a, you know, European debt crisis 2.0. Whereas, back then it was the peripheral countries, whereas here it's kind of the main growth engines of the Eurozone. So, it's not an easy fix and it's not a pretty picture for those institutional investors that own this paper.

Jeff Buchbinder (21:51):

Yeah. So I think for U.S. investors, we want to watch for this sort of leak, you know, from the global bond market sell-off into the U.S. We also want to pay attention to currency markets is probably especially the yen, right? Because you could get some weakness in the yen that translates or weakness in the Euro potentially that translates into U.S. dollar strength, which can tighten financial conditions and potentially curb international returns. And then if you get austerity eventually in these markets, that may be good for bond investors, but the equity market won't like that <laugh>. So we're not getting austerity in Japan. It looks like we're going the opposite way. But we've certainly seen in the U.K. what can happen if you don't, you know, if you just let the runaway spending continue, eventually you got to put on the brakes.

Jeff Buchbinder (22:42):

So thanks for that Lawrence. Really interesting stuff. We wish we didn't have to pay so much attention to global 30-year bonds <laugh>, but I'll speak for myself anyway, but we do so let's turn to back to the equity market and specifically kind of putting this 30% run since April in perspective. The first way we do that is we look at how stocks historically have done after they recover from corrections. So we define a correction as a 10 to 20% decline. We mark the point where the S&P 500 recovers from those 10 to 20% corrections. So in this case, it was June 27 of this year when we dug ourselves out of that hole from April and May. From that point, we've gained about 5%. My claim is that that is following the normal playbook, and that's the title of the Weekly Market Commentary.

Jeff Buchbinder (23:46):

Stocks are just following the playbook. So let me explain this. This scatterplot shows you the amount of the correction on the horizontal axis. So they're all between negative 10 and negative 20. And then on the vertical axis, it shows you how stocks do after that correction is recovered. So again, in this case, it would be after June 27. And what you see is two really interesting things. First of all, only two of these one year periods were down. This is a 12 month read after the correction is recovered. Only two one year periods that were down out of 23 corrections since 1950. So you got a very good chance that the stock market goes up even after you recover those corrections. The other thing that I think is interesting is, look how many of these dots are above 10%? You get, it's about 70% of the time, you actually get a double digit return, 10% or more in the 12 months after these corrections are recovered. So this averages 16% as you see on this chart, that is a very positive data point, and we think, frankly, we're pretty likely to follow this pattern, maybe not necessarily double digits, but we think it'd be realistic to expect close to that.

Jeff Buchbinder (25:09):

Now, let's look at this from a different perspective. This is a similar exercise, but instead of just looking at corrections, we look at bear markets. Now, this was a bear market earlier this year. If you measure it on an intraday trading basis, the S&P 500 was down 21% on an intraday basis from its high in February. So let's just count this as a bear market and compare it to all of the other post bear market recovery bull markets. This first chart shows you there's two, this first one tells you that on average these bull markets go on for an additional 27 months. So that would mean 27 months from June of this year, on average, we'd continue a bull market into the peak. Now, this is not quite like 1982 or 1991. Maybe it's like 2013.

Jeff Buchbinder (26:13):

It's reasonable to expect maybe a little bit of a shorter <laugh> bull market this time, just because we didn't have a really deep sell-off compared to bear markets, right? A lot of bear markets are down 30% or more. So it was pretty shallow bear market, if you call it a bear market. And valuations were pretty high coming in. So it's still reasonable, we think, to expect this bull to run another year, year and a half, maybe two years. But we want to just put out that little bit of a hedge because of the nature of the, we'll call it shallow bear market that we experienced earlier this year. All right, so same study. Look at the bear markets after they have recovered to the prior high. What do you do from there? So again, on the last slide I showed you that we get a 27 month run on average in the bull markets.

Jeff Buchbinder (27:11):

Here's the returns. On average you get 51%. Now that is, it's much better to look at the median, which is certainly much lower than that. But point is, look at all of these double digit returns after these bull markets. After these bear markets are recovered, 30, 15, call it 11, 16, nine, 30, 85, 15, 42. This is for the listeners who aren't watching, 57. There's a lot of double digit returns on here. So if we call what we just had in April and May a bear market, and it was very, very close, it was 19%, close to close, 21% on an intraday basis, then there is an excellent chance that even after what we just saw in terms of the recovery in June, that we have more to go. We're up 5% since then since June 27. This would tell you, you know, we probably got some decent runway ahead.

Jeff Buchbinder (28:16):

So I don't know if we're going to get double digit returns the next couple of years, but it's a very reasonable expectation based on this history of bull markets coming out of bears. So I'll go ahead and turn to the week ahead after that, but that's just in the Weekly Market Commentary. So if you want to read more of our thoughts on this bull market you can find that on lpl.com. I don't want to sound too bullish because we still think we are due for a pullback. It could be a correction, 10%. more likely, it's a pullback in the five to seven range, but we think we're due for one of those, and it'll probably come this fall. But that doesn't really tell you anything about how long this bull market's going to go, because we'll probably recover from the next sell-off and keep going again, because we're going to keep this economy growing. Speaking of the economy, let's turn to the week ahead, economic data. So back to you Lawrence. We've got inflation data this week. We have also got an ECB meeting, I understand and you know, you're a bond guy, you don't care about Apple, but we also have an Apple, I guess, iPhone event this week that'll get some attention. So what are you watching? What are you expecting?

Lawrence Gillum (29:35):

I will say that there are some Apple bonds out there that trade inside Treasuries with a negative spread. So maybe Apple's the new, you know, risk-off safe haven asset. But.

Jeff Buchbinder (29:46):

How about that? Apple, I wouldn't call it a risk-free bond <laugh>, but it's certainly priced like one that's interesting.

Lawrence Gillum (29:55):

So yeah, this week it's inflation week, as you point out, CPI for August. The expectation is that we are going to see some of that tariff pass through, some of those consumer prices increase a little bit year over year. Our chief economist thinks that over the next couple of months we're going to have continued increasing inflationary pressures. That seems to be priced in ish. So I don't know how much of a big reaction we'll get out of the bond market if the numbers come in as expected. You know, certainly the risk that we get inflation numbers that are greater than what's expected and that would negatively impact the bond market. So outside of inflation though, you, I mean, I'll be curious to see what shows up on that those benchmark revisions.

Lawrence Gillum (30:39):

I remember last year we had a pretty big revision. The expectation is there's likely going to be another pretty big downward revision. So maybe the job market isn't as robust as people thought it was you know, coming into the year and earlier in the year. So the other thing I'll be paying attention to this week is we do have some auctions, the 10-year and a 30-year auction this year, or I'm sorry, this week. So given the concerns about, you know, debt and deficit spending, we'll see if buyers show up to those auctions. But for the most part, it, you know, it should be about the inflation data this week.

Jeff Buchbinder (31:20):

Well, I would think after the jobs report Friday and potentially those job revisions, that there'd be pretty good demand for those auctions.

Lawrence Gillum (31:28):

Yeah, that's right. So if the

Jeff Buchbinder (31:31):

Even though yields have come down.

Lawrence Gillum (31:32):

The job, if the job market is kind of weaker than what we expected, and there's already a lot, as we talked about, there's already a lot of rate cuts priced in the markets, but there can always be more <laugh>. So, if the data does show up weaker than expected, then we could get a bid out of the long end of the curve, which goes back to the good part of the good, bad and ugly. If that were the case, then you know, it would show that the bond market is providing that diversification benefits just like it has historically.

Jeff Buchbinder (32:03):

Very good. So we will leave it there. Thank you Lawrence for joining, for previewing the week ahead. I didn't even know there were bond auctions. This is why I'm glad you're on. And we wanted somebody on who was happy about the football over the weekend. So there was that piece of it too.

Lawrence Gillum (32:19):

I have a feeling I'm going to be happy every, I just jinxed myself, didn't I? I think I just jinxed the Bucs, but no yeah, I'm happy this week anyway,

Jeff Buchbinder (32:27):

Go Bucs. Well, you know what? More exciting than the Bucs victory even for Bucs fans, I think is my daughter's 16th birthday is today. So I'm going to end on that happy note. So happy, happy birthday to her. Happy 16th birthday, Hillary, love you. Going to make sure this birthday is special. We've already got, she's at school, but we already got some special surprises for her. And I think I might have to ask you for a loan, Lawrence, after we spend what we're going to spend on the 16th birthday presents. We'll, we'll see, we'll see. I'm going to have to stretch a little bit. My credit quality, my bond rating will definitely be down next week. <Laugh>. So everybody, thanks for listening to LPL Market Signals. We appreciate your support. And thanks again, Lawrence, for joining. We will see you next time. Take care, everybody.