The risk appetite in the bond market has picked up this year as investors grow more comfortable with the economic outlook and the path of interest rates. A set of bond ETFs through yesterday’s close (Feb. 24) highlights a clear trend so far in 2026: favoring government securities with longer maturities has been a winning strategy.

Long‑dated Treasuries continue to lead by a comfortable margin year to date. The Vanguard Long‑Term Corporate Bond ETF (VCLT) is up 3.5% so far this year. In second place is the iShares 10–20 Year Treasury Bond ETF (TLH), posting a 2.8% year‑to‑date gain. On both counts, returns are far ahead of the U.S. investment‑grade fixed‑income benchmark, represented by the Vanguard Total Bond Market ETF (BND), which is up 1.5%.

The lone loser: bank loans (BKLN), which have slumped 2.0% this year. The ETF is getting hit amid heightened concerns about credit risk in leveraged loans. The pain is especially acute in the software industry, which is considered vulnerable amid rise of artificial intelligence. With nearly one‑fifth of BKLN’s portfolio exposed to software, the fund has taken a beating as the credit health of the industry has come under scrutiny.

Investors are asking: Does AI pose an existential crisis for software companies?

“The question is if [AI] agents and new platforms are interacting with existing software or replacing them,” says Jim Tierney, head of US growth investment at AllianceBernstein. “I’m leaning more to the former. What becomes the system of record for a business? It is unlikely to be a half dozen new vendors.”

As the crowd sorts out the answer, buying longer-dated Treasuries is in vogue. A key part of the reasoning is that inflation looks less threatening while the market is anticipating that the Federal Reserve will keep rates steady before resuming cuts in June, based on Fed funds futures. Add in the slowdown in economic growth and a downshift in hiring and conditions have been supportive for taking more risk in government bonds.

If one or more of those pillars shifts, the surge in the risk appetite for Treasuries could stumble. Fiscal risk is another potential source of anxiety for government bonds vis-à-vis a worrisome outlook for an already hefty federal budget deficit.

For the moment, however, the party continues as the bond market goes all-in on long Treasuries.

US economic growth posted a sizable downside miss in Friday’s fourth-quarter GDP report, but early Q1 nowcasts point to a rebound.

One theory for why output fell short of expectations in Q4 centers on the government shutdown in October. According to the Bureau of Economic Analysis, government spending subtracted nearly a full percentage point from headline GDP’s 1.4% annualized increase, marking a sharp downshift from Q3’s robust 4.4% increase.

A back-of-the-envelope estimate suggests that removing the 0.9 percentage point reduction in government spending (the deepest quarterly slide in six years) would have raised growth to the low 2%-plus range, just below the consensus forecast of 2.5%.

“The federal government shutdown clearly sent the economy careening off its strong growth path in the fourth quarter which is a one-off that won’t be repeated in early 2026,” said Chris Rupkey, chief economist at Fwdbonds.

Several nowcasts for Q1 agree, including the Atlanta Fed’s GDPNow model, estimating a 3.1% increase for GDP in the first three months of 2026 (as of Feb. 20). The New York Fed’s Q1 nowcast also reflects a recovery, albeit a softer one at an estimated rise of roughly 2.4% (Feb. 20).

Economic activity tracked by the Dallas Fed’s Weekly Economic Index indicates that the growth trend in recent history remains intact midway through Q1. The WEI rose to 2.58 through Feb. 14, the highest since August – a reading that’s above the pace of year-over-year GDP growth in 2025.

The key takeaway: The slowdown in Q4 growth doesn’t appear to be a warning flag for the economy. Although economic activity has probably slowed relative to the strong GDP increases in last year’s second half, the latest numbers point to moderate growth in the near term.

As usual these days, there could be several jokers in the deck that shock the otherwise upbeat outlook. Among the risk factors lurking at the moment: macro uncertainty following Friday’s ruling by the Supreme Court that President Trump’s tariffs are illegal and the threat of a US strike on Iran. Absent serious, sustained blowback from those events, however, the outlook still points to moderate growth for the near term.

The resilience of global markets will be tested anew this week as investors grapple with the implications of three risks that could roil sentiment: slower economic growth, the Supreme Court’s ruling that President Trump’s tariffs are illegal, and the threat of a US strike on Iran.

Let’s start with the US economy, which posted sharply slower growth in Friday’s fourth‑quarter GDP report. Output rose 1.4% — roughly half the pace expected and far behind the much stronger increases of 4.4% and 3.8% in the third and second quarters, respectively. The government shutdown was a key factor that weighed on economic activity and was estimated to have reduced growth by a percentage point.

The economy probably cooled even without the shutdown, but the slowdown was exaggerated in the official Q4 numbers. “The core of the economy is resilient,” said Michael Pearce at Oxford Economics. “With tariff pressures fading and tax cuts beginning to fuel an increase in capital spending, the economy will gather momentum in 2026.”

The initial nowcast for Q1 GDP points to a robust rebound, according to the Atlanta Fed’s GDPNow model, which is projecting a 3.1% increase. Sentiment in betting markets this morning is on board with the outlook: a 60% probability is currently priced in for Q1 growth of 3.0% or higher, according to Polymarket.

The economy may be stronger than it appears in the Q4 data, but uncertainty for trade policy spiked on Friday after the Supreme Court ruled that Trump’s import taxes were illegal. The President quickly countered that he would use another provision to impose a 15% tariff on all foreign goods coming into the country. But the whirlwind of trade‑policy news since Friday raises several questions that will take time to answer. Among the new issues raised:

* Trump’s new tariffs draw on authority from Section 122 of the Trade Act of 1974, but the provision limits how long tariffs can be imposed by the President — 150 days. Congress can extend the limit, but the unpopularity of tariffs in an election year looks like a hard sell for politicians seeking re‑election.

* Meanwhile, Trump said the administration will launch several investigations to address what it views as unfair trade practices by other countries and companies, drawing on the authority of Section 301 of the Trade Act of 1974.

Exactly how all this unfolds, and what it means for tariffs and trade, will remain a work in progress. One implication: the patchwork of trade deals the White House has negotiated with various countries now looks null and void as a sweeping, if temporary, 15% levy takes effect.

Meanwhile, the Supreme Court ruling on Friday implies that companies that paid tariffs over the past year are due refunds — $175 billion, by some estimates — a bill that would further deepen the federal government’s already steep budget deficit.

The more immediate threat for risk sentiment is the potential for a US attack on Iran. Trump is pressuring Iran over its nuclear program and has moved an array of military assets into striking range to intimidate Tehran. Talks between American and Iranian negotiators continue, but it’s not clear that Iran will capitulate — at least not to a degree that satisfies Trump.

In an interview on Sunday, Steve Witkoff, the President’s special envoy, said:

“I don’t want to use the word ‘frustrated’… because he [Trump] understands he’s got plenty of alternatives, but he’s curious as to why they haven’t… I don’t want to use the word ‘capitulated’, but why they haven’t capitulated. Why, under this sort of pressure, with the amount of sea power and naval power that we have over there, why haven’t they come to us and said, ‘We profess that we don’t want a weapon, so here’s what we’re prepared to do?'”

Some analysts fear that a US attack could trigger a wider regional conflict as Iran lashes out at its neighbors that host American military bases.

“For Iran, submitting to U.S. terms is more dangerous than suffering another US strike,” said Ali Vaez, the Iran director of the International Crisis Group. “They don’t believe that once they capitulate, the US will alleviate the pressure. They believe that would only encourage the US to go for the jugular.”

Markets now face a convergence of economic, legal, and geopolitical shocks that could easily destabilize sentiment if any one of them worsens. With growth slowing, trade policy in flux, and the risk of military escalation rising, the task of pricing in an uncertain future isn’t getting any easier.

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● Mastering Gold and Silver Markets: Insights from a Legendary Bullion Bank Trader
Robert Gottlieb
Summary via publisher (Wiley)
In Mastering Gold and Silver Markets: Insights from a Legendary Bullion Bank Trader, veteran precious metals trader, Robert Gottlieb, delivers an insightful blend of memoir and education that covers the world of bullion trading from a banker’s perspective. The book covers his journey from working at a certified public accounting firm to his position as the Global Head of Precious Metals Trading and Sales at many of the largest bullion banks in the world. Gottlieb dives deep into the critical role played by bullion banks in the global precious metals ecosystem. He provides a detailed explanation of financial and futures markets and how they facilitate liquidity and hedging strategies for their clients.

● Made in America: The Hidden History of How the U.S. Enabled Communist China and Created Our Greatest Threat
Xi Van Fleet and Yu Jie
Summary via publisher (Hachette/Center Street)
From the acclaimed author of Mao’s America comes the untold story of how misguided and selfish U.S. elites transformed China from a Communist wasteland into a global superpower—at America’s expense. One of the most effective anti-communist voices in America today, Xi Van Fleet made waves with her breakout book Mao’s America, exposing eerie parallels between China’s past and America’s present woke revolution. Now, alongside renowned Chinese dissident Yu Jie, she sounds the alarm once more—revealing how the CCP’s rise was not just enabled by Soviet Russia but, shockingly, by the United States itself.

● The Intelligent Crypto Investor: A Simple Strategy for Building Wealth in a New Financial World
John Hargrave
Summary via publisher (Wiley)
Crypto just crossed the tipping point, and everything you thought you knew about investing is about to change. The world’s biggest institutions are pouring billions into bitcoin—while most mainstream investors are still sitting on the sidelines, frozen by fear. That’s where The Intelligent Crypto Investor comes in. Backed by seven years of real-world results, this groundbreaking book shows how adding just a small slice of crypto (10% or less) to a balanced portfolio can dramatically improve long-term returns—outperforming traditional portfolios by more than 65%. Through the stories of legendary investors like Warren Buffett, Jack Bogle, and Cathie Wood, bestselling author John Hargrave unveils a clear, accessible strategy for adding bitcoin and other high-quality crypto assets to your portfolio—with minimal risk and maximum intelligence.

Please note that the links to books above are affiliate links with Amazon.com and James Picerno (a.k.a. The Capital Spectator) earns money if you buy one of the titles listed. Also note that you will not pay extra for a book even though it generates revenue for The Capital Spectator. By purchasing books through this site, you provide support for The Capital Spectator’s free content. Thank you!

CAPE Ratios and Long-Term Returns
Rui Ma (La Trobe University), et al.
January 2026
We demonstrate that 10-year equity market returns are considerably more predictable in relation to price-earnings ratios than previously thought. The traditional approach involves relating the current index price level, based on current index components, to the index earnings of previous years, calculated using those years’ components. When we estimate the cyclically adjusted price-earnings (CAPE) ratio, ensuring that index component prices and earnings are aligned, and apply a superior regression approach, out-of-sample R 2 values are over 50%. The Component CAPE ratio weights individual stock CAPE ratios by their market capitalization, whereas the traditional CAPE ratio is more closely aligned with earnings weighting.

Multiples for Valuation: Go High, Go Low, Ignore the Middle
Javier Estrada (IESE Business School)
February 2026
Multiples such as D/P, P/E and CAPE have long been viewed as being useful to forecast returns over periods of ten or so years. The evidence discussed in this article supports this belief and takes it one step further by showing that multiples are far more useful when they are relatively high or low than when they are somewhere in the middle of their historical range. In fact, relatively high or low multiples are more highly correlated to forward returns in sample, and produce better return forecasts out of sample, than multiples that lie somewhere in the middle.

Credit Spread News and Financial Market Risk
Fabrizio Ghezzi (University of California San Diego)
December 2025
This paper shows that credit spread news, defined by changes and absolute changes in corporate bond credit spreads, predict a substantial share of future variation in financial market risk. I first document a strong and robust predictive relationship between credit spread news and financial market risk. I then investigate the economic mechanism underlying this relationship and provide both theoretical and empirical evidence highlighting a central role for financial intermediaries’ risk expectations. Together, these findings establish credit spread news as statistically significant and economically meaningful predictors of financial market risk.

Mean-Reversions in the Debt-to-GDP Ratio and Predictability of Treasury Debt Returns and Surpluses
Deshui Yu (Hunan University), et al.
November 2025
The debt-to-GDP (DG) ratio should predict Treasury returns and primary surpluses according to the present-value identity, yet empirical support remains elusive. This paper resolves this puzzle by decomposing the DG ratio into a slow mean-reversion component and a local mean-reversion component. We show that the local mean-reversion of the DG ratio delivers substantially improved out-of-sample forecast gains of Treasury debt returns and surpluses, outperforming the original DG ratio, the historical average benchmark, and the adjusted ratios subject to structural breaks. In contrast, the slow mean-reversion component obscures predictive information by incorporating persistent, non-fundamental variation. Our findings are robust to alternative decomposition methods and DG ratio definitions (including nonmarketable debt). We develop a revised fiscal present-value model to rationalize the findings.

Extracting Forward Equity Return Expectations Using Derivatives
Steven P. Clark (University of North Carolina at Charlotte), et al.
January 2025
This paper develops a framework for extracting conditional expectations of future equity returns from derivative prices. We show that expected returns can be identified not only at the spot horizon, but also for forward-starting investment periods, yielding the full surface of expected future returns. Using index options, we derive theoretical bounds on future returns, and using VIX derivatives, we link risk-neutral and real-world expectations. Empirically, derivative-implied expectations exhibit sharp shifts around major crises, reveal persistent negative dependence between adjacent monthly returns, and generate economically valuable reversal signals. These findings uncover new dimensions of return predictability embedded in derivatives markets.

Learn To Use R For Portfolio Analysis
Quantitative Investment Portfolio Analytics In R:
An Introduction To R For Modeling Portfolio Risk and Return
By James Picerno

The US economy is on track to report a third straight quarter of growth in tomorrow’s delayed GDP update for Q4, based on the median of a set of nowcasts compiled by The Capital Spectator. The pace is expected to slow from Q3, but the increase will be strong enough to keep last year’s chatter about recession on the fringes of economic analysis.

Today’s revised estimate shows output in the previous quarter rose 2.7% at an annualized rate for GDP, unchanged from the previous estimate. If this median nowcast is accurate, growth will downshift from Q3’s strong 4.4% advance, which marked a two-year high.

An encouraging sign is the relatively steady run of median nowcasts lately, following several upward revisions. Nearly a month ago, the median estimate was 2.1%, which was revised up earlier this month and is holding at 2.7% ahead of tomorrow’s release from the Bureau of Economic Analysis.

The widely followed GDPNow estimate from the Atlanta Fed remains the upside outlier, currently nowcasting a 3.6% increase. Using this outlook as a guide in context with our median nowcast implies that a high-2%-to-low-3% increase is a reasonable assumption for tomorrow’s release.

Although the top-line measure of economic activity is expected to chug along at a solid pace for a third straight quarter, there are growing concerns about the so-called K-economy effect – a reference to an uneven economy across sectors and households. For example, a substantial gap in consumer sentiment has opened up between consumers with equity investments compared with households with little or no stock holdings. “Sentiment surged [in February] for consumers with the largest stock portfolios, while it stagnated and remained at dismal levels for consumers without stock holdings,” survey director Joanne Hsu said.

The gap between high and low earners “leaves the economy much more sensitive,” said Samuel Tombs, chief US economist at Pantheon Macroeconomics. “It’s almost like the stock market is the tail that’s wagging the dog of the economy,” added Emily Roland, co-chief investment strategist at Manulife John Hancock Investments.

The implication: a sharp fall in the stock market could have outsized effects on the economy. That’s a risk for 2026, but the threat is expected to remain muted in tomorrow’s GDP update.

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