The bond market situation is crazy. While everyone focuses on AI, US borrowing rates just hit the highest level since…

The bond market situation is crazy. While everyone focuses on AI, US borrowing rates just hit the highest level since June 2007. Credit card "serious delinquencies" are at the highest since 2010 and mortgage rates could near 8%. What's happening? Let us explain. (a thread)

This week, something extraordinary happened. Despite markets seeing a 40% chance of a Fed rate hike, the Fed did NOT hike rates. Yet, the US 30Y Yield rose to its highest since 2007. The most interesting part is the timing of this move, most of which came AFTER the decision.

This is unusual. The Fed decision was less restrictive than expected, but rates moved in a more restrictive direction. Why? Because we are in a new era of Fed policy. Fed Chair Warsh explicitly said on Wednesday: The Fed wants markets "to play the ball, not the referee."

While the Fed did NOT raise rates, they made it clear that inflation needs to fall to 2%. For decades, Fed policy has effectively been driven by guidance. The power of the Fed was largely in their words. Now, the exact opposite is happening, leading to immense uncertainty.

So, while the Fed is explicit in their 2% inflation target, uncertainty is everywhere. We know the Fed wants 2% inflation, but how will it get there? Couple this with ~4% US inflation, record deficits, and the Iran War energy shock. Markets are simply bidding yields higher.

Just 8 months ago, the below was consensus. Core inflation was expected to fall to 2.3% by December and markets saw 3 rate CUTS. Now, markets are pricing in 2 rate HIKES by January and the Fed is not pushing back. In fact, the Fed is encouraging the market to do as it wishes.

In our view, the Fed's hands are tied. While Trump appointed Warsh expecting rate cuts, the Fed simply cannot cut right now. The most "dovish" course the Fed can take without sending inflation to 5%+ is exactly what is happening: "Pause" and let the market dictate itself.

This means higher rates are coming even without rate hikes. The issue then becomes that higher rates are coming at a time of record borrowing. Over just 5 months, AI companies have borrowed $236 BILLION to fund AI. The US government has borrowed $1.4 TRILLION in 9 months.

For consumers, this is worse. A record 16.4% of student loans transitioned into 30+ days delinquency in Q4 2025, BEFORE this rate increase. Credit card serious delinquencies hit 13.1% in Q1 2026, the highest since 2010. The average car borrower is a record $7,200 underwater.

Without a major crisis, rate cuts are distant at best. But, this comes amid one of the biggest technological revolutions ever. We are seeing $1+ trillion in big tech CapEx in 2026 combined with 3.5%+ inflation. We expect a further broadening of the record US wealth divide.

We expect even further erosion in consumer sentiment. In April, US consumer sentiment collapsed -10% to its lowest level on record in data going back to 1952. Not even the 1980s saw Consumer Sentiment this low. We think it heads even lower, particularly for non-asset owners.

Unusual times lead to unusual opportunities in the market with elevated volatility. We seek to position ourselves for these moves in advance. Want to access our premium research? Subscribe at the link below to access our latest analysis and alerts: thekobeissiletter.com/subscribe

The Fed must now avoid a repeat of inflation in the 1970s. While Americans are still struggling with high rates, inflation is the biggest involuntary tax in history. We can't afford a return of 5%+ inflation. Follow us @KobeissiLetter for real time analysis as this develops.