Treasury Yields Rise In August – Fixed Income Overview

Yields on 30-year U.S. Treasuries rose to the highest since 2007 this past month, driven higher by inflationary concerns and better than expected employment data levels.

The Treasury Department stepped in to help stabilize the Japanese yen, the first U.S. intervention to buy the yen since 1998. The U.S. has an interest in assisting to fortify the yen because Japan is the largest foreign holder of U.S. government securities.

Several Federal Reserve members exhibited an intent to raise rates in September if inflationary pressures don’t recede. Fed members are increasingly divided about the direction of rates.

Source: U.S. Treasury

Equities Struggle To Rebound – Equity Markets Overview

A resurgence of hostilities in the Strait of Hormuz drove equity volatility higher in August as the transport of oil became further restricted,  sending oil prices higher. As a result, the S&P 500 energy sector has outperformed all other sectors in August and since the beginning of the year.

Better than expected earnings for many U.S. companies as well as consistent growth has helped mitigate some volatility and contributed to fortifying sectors such as manufacturing and energy.

For the second consecutive month, mid cap and small cap stocks underperformed larger cap stocks, traditionally the case when interest rates are rising. The cost to borrow for mid and small cap companies increases as rates rise, yet larger cap companies aren’t as affected due to more sizable balance sheets and cash flow. 

Sources: S&P, Bloomberg

How Companies & The U.S. Government Are Competing For Capital – Capital Markets Overview

U.S. government borrowing has been increasing simultaneously as U.S. companies have ramped up funding needs for massive expansion and buildouts for AI infrastructure.

The challenge for the U.S. government is the cost of carrying $40 trillion in existing debt, which currently exceeds $1 trillion per year just in interest payments alone. A fiscal deficit of roughly $2 trillion is adding to the debt burden, as government revenue is being dwarfed by massive expenditures. So in order to continue funding the shortfall, the government borrows funds in the form of selling Treasury bonds. 

Meanwhile in the private sector, U.S. companies have embarked on an enormous borrowing campaign to fund nearly 800 billion dollars in infrastructure projects for the buildout of AI infrastruture nationwide. These companies, as well as the U.S. government, have to issue and sell bonds to pay for these huge capital expenditures. 

As markets bring buyers and investors together, a shopping spree materializes, with companies and the government competing for funds by selling bonds. As more bonds are offered, the cost of borrowing essentially increases for both the U.S. government and companies.

Sources: Treasury Dept., Congressional Budget Office

Labor Share Of GDP Lowest Since 1947 – Employment Market Update

The portion of a nation’s economic output (GDP) that goes to workers as wages, salaries, and benefits rather than going to capital owners and shareholders is recognized as the labor share of GDP. The gauge, which began in 1947, has been trending down since a spike in 2020 at the height of the pandemic. How much trickles down to U.S. workers from economic activity determines the future viability of consumers and businesses.

Recent progression with integrating AI into corporate labor ranks has begun to curtail hiring trends throughout numerous industries. As companies adopt AI into certain tasks and employment positions, employees have fewer chances of wage increases and career advancements. 

In theory, AI could lead U.S. workers in becoming more efficient and productive, which could  become a catalyst for faster economic growth allowing both employees and businesses to earn more without triggering inflation. Conversely, if corporations decide they can boost profits by replacing workers with AI, then there might eventually be fewer positions and downward pressure on wages. (Sources: Labor Dept., BLS)

How IRMAA Affects Your Medicare Premium – Medicare & Social Security Update

Medicare premium adjustments are affecting many more retirees, and its a good idea to be aware of income thresholds each year. The adjustment, known as Income Related Monthly Adjustment Amount (IRMAA), is essentially an extra Medicare charge paid by income earners above certain thresholds. It affects participants who have Medicare Part B and/or Part D coverage. The IRMAA is a surcharge in addition to the monthly Medicare premium paid each month.

The IRMAA is determined using the modified adjusted gross income (MAGI) from your federal tax return.   The determination is made using the prior tax return from two years earlier. So an IRMAA in 2026 would be based on a 2024 federal tax return. MAGI for the purpose of calculating the IRMAA includes the adjusted gross income plus tax-exempt interest income.

Conversely, Medicare participants that have a decrease in income may request a re-calculation in order to adjust the IRMAA to be eligible for a lower Medicare premium surcharge. A one time realization of capital gains can also affect the IRMAA resulting in a higher premium. (Sources: Social Security Administration)