Metta Monthly | Sep 2026

Editorial Foreword

August 2026 highlighted a more complex market environment. The U.S. economy continued to expand, but the labor market began to show signs of moderation, while inflation remained above the Federal Reserve's target. As a result, the outlook for Monetary Policy remained uncertain.

For Metta, an increasingly important factor is the Long-Term Cost of Capital. Recent movements in the Treasury market suggest that long-term yields are being influenced by more than just the Policy Rate. Government Debt, Fiscal Deficit, Treasury Supply, and Inflation Expectations are becoming increasingly important drivers.

In August, the 30-Year Treasury Yield moved above 5.3%, reaching its highest level since 2007, amid growing concerns about government debt, fiscal deficits, and the amount of Treasury issuance. This has led investors to reassess the long-term cost of capital and the valuation of financial assets.

In this environment, Metta believes investors should look beyond the direction of interest rates alone and monitor Growth, Inflation, Long-Term Yields, and Fiscal Risk together.

Market & Macro Snapshot Asset-class performance

• Equities (ACWI): +2.72% Global equities gained during the month, supported by continued economic expansion and corporate earnings. However, investors remained focused on inflation, long-term interest rates, and geopolitical risks.
• Fixed Income (AGG): +0.39% U.S. bonds delivered a modest positive return despite volatility in Long-Term Yields. Concerns surrounding government borrowing, inflation, and Treasury issuance continued to influence the bond market.
• Gold (GLD): +9.93% Gold was the strongest-performing major asset class during the month. Demand was supported by the need for diversification amid uncertainty surrounding inflation, Fiscal Risk, geopolitical developments, and the Treasury market.

Macro & Policy Developments

• Inflation: July CPI, released in August, came in at 3.4% YoY, while Core CPI was 2.5% YoY. CPI increased 0.1% MoM, indicating that inflation remained above the Federal Reserve's 2% target.
• Labor Market: The unemployment rate stood at 4.1%, while Nonfarm Payrolls declined by 23,000 jobs, providing signs that labor market conditions were beginning to moderate.
• Economic Growth: Real GDP grew at an annualized rate of 1.5% in Q2, down from 2.1% in the previous quarter. The economy continued to expand, but growth momentum moderated.
• Consumption & Income: PCE increased 0.2% MoM, while Personal Income rose 0.4% MoM, indicating that household income and spending continued to support economic activity.
• Manufacturing: Manufacturing PMI stood at 55.6 in July, with the data released in August. The reading remained above 50, indicating continued expansion in manufacturing activity. Meanwhile, the ISM Prices Index reached 71.1, highlighting continued cost pressures.
• U.S. Treasury Bond Market: The U.S. Treasury market experienced significant volatility during August. The 30-Year Treasury Yield moved above 5.3%, reaching its highest level since 2007, amid concerns surrounding Government Debt, Fiscal Deficit, Treasury Supply, Inflation, and Geopolitical Risk.
  The key point is that Long-Term Yields are not determined by the Policy Rate alone. They also reflect market expectations for inflation, the amount of Treasury issuance, and the return investors require to compensate for long-term risks.
  During the same period, the Treasury increased the size of its long-term Treasury Buyback operations to support market liquidity and functioning. However, Buybacks are not a direct tool for determining the level of the 30-Year Treasury Yield.

Sources: U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis, Institute for Supply Management, U.S. Department of the Treasury, Federal Reserve Bank of St. Louis, Reuters. Market performance is illustrated using ACWI (Global Equities), AGG (U.S. Investment-Grade Bonds), and GLD (Gold).

Metta Associates's Strategic Reflection

August demonstrated that portfolio construction should not rely too heavily on predicting a single economic variable. While the Policy Rate remains an important driver of financial markets, the behavior of Long-Term Yields shows that the long-term cost of capital is influenced by a broader set of factors, including Fiscal Policy, Inflation, Treasury Supply, and Term Premium. Together, these factors can shape the level of Long-Term Yields and have important implications for asset valuations.

For Metta, the key question is therefore not only "When will the Fed cut rates?" but also "How is the long-term cost of capital changing?" A slowing economy does not necessarily mean that Long-Term Yields will decline. If inflation remains elevated, government borrowing continues to increase, or investors demand higher Risk Premiums, Long-Term Yields can remain high even as economic growth moderates. This highlights why the direction of the Policy Rate alone may not fully capture the broader market environment.

For this reason, Metta believes Portfolio Construction should focus on Diversification Across Risk Drivers, considering Growth, Inflation, Interest Rates, and Fiscal Risk together rather than relying on a single economic forecast. The objective is not to predict every market movement correctly, but to build balanced and resilient portfolios that can navigate a range of economic and market environments.

Latest Insights from Metta Associate

In recent years, financial markets have focused heavily on Monetary Policy and the Policy Rate, as changes in interest rates influence liquidity, financing conditions, and asset valuations. However, recent movements in the Long-Term Treasury Yield suggest that the market is increasingly looking beyond Monetary Policy toward Fiscal Policy and Fiscal Risk. Government Debt, Fiscal Deficits, Treasury Supply, and Inflation Expectations are becoming increasingly important in determining the long-term cost of capital.

August provided a clear example of this shift, as the 30-Year Treasury Yield moved above 5.3%, reaching its highest level since 2007, amid growing concerns over government debt, fiscal deficits, and Treasury issuance. This has important implications beyond the Treasury market. When Long-Term Yields remain elevated, borrowing costs increase and discount rates rise, which can place pressure on both Bond and Equity Valuations, particularly for assets whose valuations depend heavily on cash flows expected further into the future.

For Metta, this environment reinforces the importance of looking beyond the next move in the Policy Rate and focusing on the broader Long-Term Cost of Capital. As Growth moderates while Long-Term Yields remain elevated, portfolio construction should place greater emphasis on Diversification, Valuation Discipline, Cash Flow Generation, and Balance Sheet Strength. The objective is not to predict every market movement, but to build portfolios that can remain resilient across different market environments while continuously monitoring the key Risk Drivers of Growth, Inflation, Interest Rates, and Fiscal Risk.