Breaking news! The bond market has already done the work for the Federal Reserve—can Waller just lie back? But there’s a catch waiting for you—an AI debt bomb is drawing near.

Let’s talk about something hard-core today. In the latest episode, DoubleLine’s Deputy CIO Jeffrey Sherman said something that has sent chills down many people’s spines: the bond market has already completed part of the tightening work ahead of the Federal Reserve. What does that mean? It means the market itself has pushed interest rates up; Chairman Waller (or at least “Waller/沃什” in the text) might do nothing, and simply wait for the data.

Sherman’s exact wording was: “What you’re seeing now is that the market has already done the work for the Federal Reserve— the yield curve has developed an upward slope, and the policy rate is below all other rates on the curve. So, Chairman Waller may, for the time being, not need to take any action—just sit back and see how things play out.” He also said the market is no longer consistently pricing in rate cuts the way it did over the past three years; instead, it has started to reflect the possibility of rate hikes over the next year. For those betting on a September rate hike, the bar is extremely high—requiring a lot of data, and it’s only five weeks until the election, with political pressure right there in front of everyone.

On inflation, the June CPI data came in clearly weaker than expected. Core CPI, after rounding, is negative 2 basis points, the first month-on-month negative reading since 2020. The inflation swap market has cooled off too—at one point the one-year inflation rate fell below 2%. But Waller remained cautious in his congressional testimony, saying it’s just one data point and people shouldn’t get overly optimistic. Sherman pointed to the key: core PCE is more stubborn than CPI, because AI software demand is lifting it. Portfolio management fees are directly linked to stock prices—when the stock market rises, this part shoots up. The good news is that in September, the U.S. Bureau of Economic Analysis will recalibrate PCE, adjusting how it measures software and portfolio management fees, which could reduce the year-over-year return rate by 20 to 30 basis points.

On the labor market side, wages are returning to pre-pandemic levels, and labor supply and demand are more balanced, so the risk of a wage–price spiral is not obvious. But ordinary consumers don’t feel it well—price pressure is more direct for items like insurance and gasoline. Actual consumer spending year over year is still above 2%, but real wages are basically flat. Can this divergence last? Unless households tap savings, it’s hard to sustain. The wealth effect from the stock market, crypto, and real estate is still supporting consumption, but generational wealth transfers are also at work.

In fixed income, the market overall has been fairly stable this year, but the performance is clearly divergent. CLOs and floating-rate bonds are doing well; CCC-rated loans are lagging, and the software sector is especially under pressure. The Treasury market doesn’t buy the narrative that rates will drop sharply. Sherman noted that if the 10-year U.S. Treasury yield breaks above roughly 5.25%, the dynamics in other markets could change. High-quality assets finally have yield: investment-grade corporate bonds at 5%–5.5%, residential mortgages at 5.3%–5.8%, high-quality CMBS at about 5.1%, and high-rated CLOs at about 5.1%. But if you want yields above 6%, you have to take risk.

What’s most worth watching closely is AI-related debt financing and the private credit market. Sherman said it plainly: if someone is pitching you bonds offering as high as 10% or 11% and claiming they’re investment-grade because they’re “private” projects—at least from the perspective of the public markets—the risk is not low. CCC-rated high-yield bond yields are already around 14%, and loan market yields are as high as 16%, but how much principal you can actually get back is another question. Recently, the BB-rated and CCC-rated markets have started to decouple, and historically, this kind of divergence often means one side needs to catch up to the other.

Sherman ended with a final summary: the bond market is doing its job—it’s sniffing out the data. For retail investors, don’t be swayed by high yields; understand the risks in the underlying assets. The debt-financing pressure behind AI mania may become the next trigger point.

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