US CPI Fuels Fed Wagers, US Inflation Comes In Cooler Than Expected | Real Yield 2/13/2026

Key Concepts

• Shifting Rate Cut Expectations: Market expectations for Federal Reserve rate cuts are being recalibrated based on recent economic data, with a focus on the PCE price index.
• AI’s Impact on Spending & Credit: The “AI arms race” is driving significant spending, disrupting traditional cash flow underwriting, and creating demand for financing, particularly in the tech sector.
• Diversification of Funding Sources: US companies are increasingly utilizing “reverse Yankee” bond sales to diversify funding and potentially lower borrowing costs.
• Transparency Concerns in Private Credit: A Bloomberg investigation revealed inconsistencies in investment classification within private credit funds, raising concerns about accurate portfolio valuation.
• Economic Data Sensitivity: Markets are highly sensitive to incoming economic data, particularly inflation figures, and the Federal Reserve’s response.

Economic Landscape & Rate Expectations

The US economy presents a mixed picture, with encouraging, though potentially overstated, labor market data and moderating inflation. While the January CPI data was “encouraging under the surface,” concerns remain about core services inflation and potential upward pressure from tariffs. The labor market is potentially overstated by approximately 60,000 jobs per month. Despite these mixed signals, the economy is expected to accelerate.

This data has led traders to reprice expectations for Federal Reserve rate cuts. The two-year Treasury yield fell to its lowest level since September 2022, reflecting this shift. The discussion centers on the expectation of the Federal Reserve reaching a “neutral” funds rate by the end of the year, potentially through three rate cuts, contingent on inflation trends. A “Warsh Fed” – prioritizing reaching neutrality before further easing – is also considered, given the current restrictive policy. The market is highly sensitive to upcoming PCE data, with concerns that a rise above 3% year-over-year could dampen expectations for near-term rate cuts.

The “AI Arms Race” & Credit Markets

A significant spending spree driven by the competition in artificial intelligence is disrupting various sectors, impacting both public and private debt markets. This is leading to a re-underwriting of cash flows across multiple industries. Companies like Applied Materials and Arista Networks are experiencing record sales and increased analyst price targets due to demand for AI and memory semiconductors. Despite concerns about disruption, Holden Sprout of Tomo Bravo argues that software companies leveraging and developing AI represent a strong buying opportunity, stating, “Software is A.I. if you do it right.”

This demand is evident in financing activity, such as the $3.8 billion junk bond sale from Tracked Capital, linked to a data center leased to Nvidia, which received over $14 billion in orders. Tech sector credit is experiencing a shift, with tech bonds trading at a discount for the first time since the financial crisis, reflecting increased supply and potential risk.

Funding Diversification & Bond Market Trends

US companies are increasingly issuing debt in non-dollar markets – termed “reverse Yankee” sales – to diversify funding sources and potentially lower borrowing costs. Alphabet’s recent $5.5 billion sterling bond sale (the largest ever corporate sale in that market) and its Swiss franc offering exemplify this trend, including a rare 100-year note. Goldman Sachs and JPMorgan also participated in the surge of reverse Yankee bond sales in Europe. US high grade bond issuance topped $40 billion for the week, matching estimates.

Private Credit Transparency & Upcoming Events

A Bloomberg investigation revealed inconsistencies in how private credit firms classify their investments. Some companies labeled as “software” in one fund are categorized as “food” in another, raising concerns about transparency and accurate portfolio valuation. This highlights the need for greater scrutiny within the private credit market.

Looking ahead, key economic events include the release of FOMC meeting minutes, earnings reports from major companies (Walmart, Carvana, Molson Coors), U.S. PCE data, and a potential Supreme Court ruling on President Trump’s tariffs. Rivian reported better-than-expected Q4 metrics and first annual gross profit, projecting vehicle deliveries of 62,060-70,000 for the year.

Conclusion

The current economic landscape is characterized by shifting expectations regarding Federal Reserve policy, driven by mixed economic data and the influence of the “AI arms race.” Companies are adapting by diversifying funding sources and navigating a changing credit environment. However, concerns remain regarding transparency within the private credit market and the potential for inflation to reignite, requiring careful monitoring of key economic indicators and a cautious approach to portfolio management.