The Quiet Crisis of the Post-Thanksgiving Bond Market
The Friday session following Thanksgiving is traditionally a low-volume affair, a sleepy bridge to the December frenzy. This year, the silence in the pits was replaced by a sharp, rhythmic thud of selling pressure. As of the close on Friday, November 28, the 10-year Treasury yield surged toward 4.58 percent, reflecting a market that has finally stopped believing the disinflation fairy tale. While much of the financial press is distracted by holiday retail foot traffic, I have been focused on a more systemic shift. The narrative of a clean, AI-driven soft landing is beginning to crack under the weight of persistent service-sector inflation and a Federal Reserve that appears increasingly boxed in by its own optimism.
The central tension of late 2025 lies in a fundamental disagreement between equity valuations and the reality of the credit markets. On one side, we have the productivity evangelists. Michael Gapen, Chief U.S. Economist at Morgan Stanley, has spent much of this quarter arguing that the integration of generative artificial intelligence will act as a structural tailwind for GDP growth. The theory is elegant. By automating the mundane, companies can expand margins without raising prices. However, the data released this week suggests a different trajectory. According to the latest PCE price index report from the Bureau of Economic Analysis, core inflation remains stuck at 2.7 percent. This is not a rounding error. It is a floor that the Federal Reserve seems unable to penetrate.
The Nvidia Paradox and the Capex Trap
To understand why the productivity miracle has yet to manifest in the macro data, one must look at the capital expenditure cycles of the technology titans. Per Nvidia’s Q3 2025 earnings release, the demand for Blackwell architecture remains insatiable, yet the inflationary footprint of this build-out is rarely discussed. We are witnessing a massive reallocation of capital toward data centers that consume immense amounts of energy and specialized labor. This is cost-push inflation in its purest form. While Nvidia shareholders celebrate record margins, the broader economy is paying the bill through rising industrial electricity rates and a talent war that keeps wage growth uncomfortably high.
I have argued for months that we are in a transition phase where AI is a net consumer of resources rather than a generator of efficiency. The lag between the purchase of a H200 cluster and a measurable uptick in national productivity can be measured in years, not quarters. In the interim, the Federal Reserve is forced to contend with the liquidity we injected into the system in 2024. The wealth effect from the S&P 500’s 20 percent year-to-date run has kept consumer demand high, even as the cost of borrowing for the average American family hits levels not seen in two decades.
Visualizing the Yield Surge of November 2025
The following visualization tracks the movement of the 10-year Treasury yield through the month of November. Notice the acceleration following the mid-month inflation updates and the final pre-holiday PCE print. This is the market pricing in a higher terminal rate for 2026.
The Labor Hoarding Phenomenon
One of the more perplexing data points of late 2025 is the resilience of the labor market in the face of restrictive interest rates. Unemployment remains near historic lows, yet job openings are cooling. This suggests that firms are engaged in labor hoarding. They are terrified of the hiring difficulties of 2022 and 2023, choosing to keep staff even as output slows. This behavior is fundamentally anti-inflationary in the short term because it keeps wage growth steady, but it destroys the productivity narrative that Gapen and others are relying on. If companies are keeping more people than they need while also spending billions on AI, their unit labor costs are actually rising.
We can see the divergence clearly when comparing the tech-heavy Nasdaq 100 with the broader Russell 2000. The divergence is at a five-year high. Small-cap firms, which represent the bulk of U.S. employment, are suffocating under the weight of 7 percent equipment loans, while the Mag 7 sit on mountains of cash. This creates a two-speed economy that the Federal Reserve is ill-equipped to manage with the blunt tool of the fed funds rate. According to market data provided by Bloomberg, the spread between high-yield corporate bonds and Treasuries is beginning to widen for the first time since the spring, a signal that the credit cycle is finally turning.
Macro-Economic Indicators: Q4 2025 Flash Report
The following table outlines the current economic reality as we enter the final month of the year. These figures represent the actual hurdles facing the Federal Open Market Committee at their December meeting.
| Indicator | September 2025 | October 2025 | November 2025 (Est.) |
|---|---|---|---|
| Core PCE (YoY) | 2.6% | 2.7% | 2.7% |
| 10-Year Treasury Yield | 4.15% | 4.32% | 4.58% |
| Real GDP Growth (Annualized) | 2.4% | 2.1% | 1.9% |
| Manufacturing PMI | 48.2 | 47.5 | 47.1 |
The Fragility of the Consensus
I find the current consensus deeply unsettling. The prevailing wisdom suggests that the Fed will cut rates in December to support a slowing economy, but the bond market is doing the opposite of what it should do if a cut were imminent. Long-term yields are rising. This is the market’s way of telling Jerome Powell that his work is not done. If the Fed cuts into a 2.7 percent inflation floor, they risk a repeat of the 1970s style ‘double-top’ inflation spike. If they hold, they risk a hard landing in the first half of next year as the wall of corporate debt maturities begins to hit.
The technical mechanism of this failure is the velocity of money. While the M2 money supply has stabilized, the speed at which that money is moving through the AI ecosystem is accelerating. Every dollar spent by Microsoft or Google on Nvidia chips circulates through a high-velocity chain of contractors, engineers, and energy providers. This keeps the ‘hot’ parts of the economy boiling while the ‘cold’ parts, like housing and regional banking, are frozen solid. This is the dual-track reality of November 30, 2025. It is an economy of haves and have-nots, where the ‘haves’ are driving inflation and the ‘have-nots’ are bearing the cost of the interest rates meant to fight it.
The market is currently obsessing over the January 2026 fiscal policy shift and the potential for a renewed tariff regime. This will be the defining theme of the next quarter. Investors should closely watch the December 17 FOMC dot plot. If the median projection for the 2026 terminal rate moves above 4.25 percent, the current equity rally will face its most significant test since the 2022 bear market. Watch the 2-year Treasury yield. If it breaks 4.75 percent before the year-end, the narrative of the productivity miracle will be officially dead, replaced by the cold reality of a structural inflation regime.
