September Bond Policy Update

In this piece, we take key points from our firm's most recent Bond Policy Meeting and share them with our readers. Hopefully, this piece will provide some insight into the economy and fixed income markets and give you a sense of how our team is thinking about recent trends and developments.

Crawford Bond Policy

• The economy continues to look resilient with growth tracking above the old 2% baseline, driven by AI-driven productivity and capital expenditures, a healthy consumer, and strong corporate earnings. However, the picture remains mixed:

  • The unemployment rate reflects full employment, but the labor force is shrinking due to the exodus of immigrants, demographics, and baby boomers retiring.
     
  • August Core CPI showed month-over-month acceleration, but it was driven by volatile services components.
     
  • The ability to sustain a significant portion of the growth experienced is reliant on continued AI ecosystem capital expenditures.
    
    

• Ultimately, we find ourselves in a "good news/bad news" macro environment where resilient growth and earnings coexist with a shrinking labor market and stalled disinflation.

• Interest rates have moved higher across the yield curve driven by the Fed reversing policy to tightening mode, and the market demanding higher term-premium.

• Ultimately, we believe a certain level of vulnerability exists based on:

  • Economic growth’s continued dependence on AI ecosystem capital spending.
    
   
  • The U.S. government’s limited willingness and ability to reduce deficits and ease the term premium.
    
    
  • A reversal in the Fed’s rate policy adding pressure to funding costs.
    
   
  • Uncertainty surrounding an end to the conflict in Iran and the resulting inflationary pressures.
    
    
• Consequently, we remain defensively biased in terms of sector weights and curve positioning in corporate bonds. We plan to maintain our target level of duration until we have better visibility into the cycle stage. 
  
  
• In municipal bonds, we are willing to take advantage of the yields offered in high coupon callable long-term bonds for clients in high tax brackets focused on maximizing earned income with an ability to weather potential price volatility.  
  
  

Treasury Market

• Long-term Treasury yields moving to pre-crisis levels has dominated the bond market narrative this summer. 

• The 30-year Treasury yield reached an intra-day high of 5.40% on September 15th, a level last seen in May 2007.

• As seen in the table above, most of the move in yields can be attributed to higher real yields, particularly since the war with Iran commenced at the end of February.

• Drivers include AI/hyperscaler debt funded capital expenditures "crowding out" sovereign issuance and rising term premiums driven by growing debt and deficit concerns.

• The U.S. Treasury has increased buybacks of longer-term debt, briefly lowering long-term yields without reversing the broader rise in yields. Funding these purchases with more Treasury bills increases exposure to short-term borrowing costs.
  

• The 10-year Term Premium has more than doubled since the war started. It reflects the markets required compensation for a lack of predictable future inflation, fiscal management, and Fed Funds natural rate. 
   

• Widening fiscal deficits, secular demographic trends (labor force shrinkage), and lingering geopolitical/energy volatility from the Iran conflict are pressuring the Term Premium higher.

• The U.S. debt level has reached over $40 Trillion and the interest cost of servicing that debt has eclipsed $1 Trillion (higher than the defense budget). With $5 Trillion in annual revenue and $7 Trillion in annual expenses (~$5 Trillion is mandatory), it is difficult to see a path leading to a reduced debt and deficit picture.  
  
  

Investment Grade Corporate Bond Market

• Investment grade corporate bond spreads (yield compensation for credit risk) are compressed near historic lows. 

•  Investment-grade issuance year-to-date has eclipsed 2025’s total issuance, and is on track to surpass the 2020 record of $1.75 Trillion 
  
  
• AI-related issuance (hyperscalers, semiconductors, and now SpaceX) has driven record net IG supply in 2026, bringing over $132 Billion to market year-to-date, versus total 2025 issuance of $93 Billion.
  
  
• Hyperscalers have increasingly shifted from free-cash-flow-positive to debt-reliant with capex guidance continuing to rise. On average, issuers in the AI ecosystem are now trading approximately 25 basis points in spread above the investment-grade index, whereas they were more than 10 basis points below the index a year ago. 
  
  

• Importantly, demand remains strong as illustrated by record cumulative investment-grade mutual fund flows and new issue metrics.

Municipal Bond Market

• Yields have increased across the “AAA” Municipal Scale since the beginning of the Iran conflict, but year-to-date movement is less dramatic due to the significant decline in yields leading up to the war.  

• Municipal bonds continue to face a supply/demand mismatch that started in July and is expected to continue through October. Issuance has reached record levels.
  
  
• At the same time, technical support is softening: reinvestment flows are set for a seasonal drop into September/October, fund inflows have slowed as Treasury yields have risen, and dealer inventories/bid-wanted activity (a proxy for selling pressure) are both increasing. 
  
  
•  Valuations remain rich by historical standards and pockets of credit deterioration continue to emerge. For example, State property tax reform ballot measures could pressure municipal revenue-raising capacity and credit quality if passed. States to monitor include FL, TX, OK, WY, and GA. 

DOT Plot and Summary of Economic Projections (SEP)

• A solid payroll report, a low unemployment rate, and a worsening Core-CPI print provided the FED the ammunition it needed to raise the Fed Funds rate 25 basis points (0.25%) on September 16th.

• Only 18 officials are represented in the SEP because Chairman Warsh recused himself from voting again. He views those projections negatively in the context of his trying to eliminate forward guidance from the Fed. 
  
  
• Median GDP growth projections for 2026 and 2027 were revised up, indicating optimism from FOMC participants about economic growth upside despite elevated energy prices and uncertainty about geopolitical developments.
• Median projections for the unemployment rate for 2026-2028 were revised down and remain below the median participant's estimate of the longer-run neutral rate of unemployment.
  
  
• PCE inflation projections for 2026 and 2028 were nudged upward, showing more persistently elevated inflation, with the median not expected to return to 2.0% until 2029.

• The revised dot plot indicates that the median participant will want to hike rates another 25 basis points (0.25%)  this year, hold rates in 2027 at 4.00-4.25%, then cut 25 basis points (0.25%)   each in 2028 and 2029. 
  
  
• The longer-run dot was revised up to 3.25%, reinforcing the message that FOMC participants are no longer viewing the recent level of rates as restrictive as previously believed.
  
  

• Bottom Line: the SEP paints a “hawkish” picture. The exact numbers and likelihood of projections being correct are less important than the mentality of the board and direction of travel.

Disclosures

Crawford Investment Counsel (“Crawford”) is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Crawford, including our investment strategies, fees, and objectives, can be found in our Form ADV Part 2and/or Form CRS, which is available upon request.

The opinions expressed are those of Crawford. The opinions referenced are as of the date of the commentary and are subject to change, without notice, due to changes in the market or economic conditions and may not necessarily come to pass. There is no guarantee of the future performance of any Crawford portfolio. Crawford reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. 

Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. CRA-2609-6