Stephanie Pomboy: The Higher Yields Go, The Higher The Odds The Market Cracks

Pomboy argues that slower inflation does not mean prices are falling, helping explain why consumers still feel squeezed while interest rates are at a 20-year high. She says the reported 4% year-over-year spending growth overstates household strength: spending is concentrated in transportation and home insurance and is being supported by savings drawdowns, credit-card debt, and, among wealthier households, investment income used to pay bills.

Pomboy says annual deficits are about $2 trillion even in good times and could rise sharply in a recession, while interest expense is adding to the financing burden with each basis-point increase in short-term rates. She argues that ongoing $40 billion monthly T-bill purchases and Bessent’s continuation of front-end financing illustrate how policymakers have retained financing approaches they had criticized or planned to change, while bond investors remain unconvinced that anything substantive will shift.

Pomboy says higher rates have coincided with corporate bankruptcies, downgrades, consumer delinquencies, and higher deficit interest expense, even as equity gains and an AI-related corporate-profit feedback loop have muted the visible strain. She also says the pace of rate changes can matter more than the absolute level, describing a reflexive process in which rates could rise enough to reverse themselves.

Pomboy says household spending funded by investment income depends on markets staying up, while markets are heavily reliant on the AI trade continuing to surge and surprise to the upside. She argues that rising rates and credit spreads threaten that trade because it depends on continued credit availability, and expects a more dramatic market event, potentially resembling 2018.