The Iran conflict continued to generate significant volatility throughout August despite little net change in oil prices by month end. Early in the month, President Trump pulled back from a planned strike and Strait of Hormuz negotiations resumed through Oman, triggering a relief rally across risk assets and a decline in crude. By mid-month, however, Iranian officials threatened a shift to a "fully offensive" posture and set a deadline for full implementation of the MOU, pushing yields and oil higher once more. A further flare-up at month end left the situation unresolved. Oil finished the month roughly where it started, but the path was anything but calm.
Inflation data for the second consecutive month came in better than feared. The July CPI showed core prices rising 0.2%, bringing the twelve-month rate down to 2.5%, while the headline edged up only 0.1% with the annual pace declining to 3.4%. Producer prices were also softer, with the headline PPI flat and core up modestly. The July PCE report showed core increasing 0.2%, leaving the twelve-month rate at 3.3%, though only a whisker separated the unrounded figure from printing 3.4%. Two months of encouraging readings are welcome, but the year-over-year figures remain well above the Fed's target and 65 consecutive months of above-target consumer inflation is a record that weighs on policymakers.
Chair Warsh used his Jackson Hole speech to deliver an unambiguous message on inflation. He described the 2% PCE target as a "firm, fixed" objective, noted that 54% of the PCE basket still shows price increases above 3%, and stated that the recent data "do not tell me that underlying trends have meaningfully improved." He laid out a framework centered on the primacy of interest rates as a policy tool, the risk of persistent inflation expectations, and a deliberately limited role for forward guidance. The front end of the curve sold off sharply after the speech. On the labor market, July nonfarm payrolls declined by 23,000, though private employment rose by 30,000 with the decline driven by seasonal distortions in local government education hiring. Prior months were revised down by 103,000. The unemployment rate fell to 4.1% as the labor force continued to contract. The preliminary benchmark revision to payroll data through March 2026 indicated a downward adjustment of 79,000 jobs.
The month's most striking market development may have occurred at the long end of the Treasury curve. The 30-year yield briefly touched levels not seen since 2007, driven by a combination of elevated supply, fiscal uncertainty, and structural term premium pressures. The Treasury Department responded with an unusual mid-cycle announcement that it would at least double the size of its bond buybacks, while Japan gained access to the Fed's FIMA repo facility for dollar funding, reducing the risk that Japanese institutions would need to liquidate Treasury holdings to raise dollars. Both measures helped stabilize the long end, which rallied from its highs. Net on the month, the curve flattened modestly, with the front end a touch higher after the Warsh speech and the long end roughly unchanged. Investment grade spreads were little changed and agency MBS spreads tightened slightly.
In Short Term Bond Fund, we maintained high-quality positioning throughout a volatile month. Agency mortgage exposure was managed actively as spreads tightened modestly. Duration remains aligned with the peer group and liquidity is robust. The back-to-back improvement in inflation data is a constructive development, but Warsh's Jackson Hole remarks made clear that the bar for the Fed to stand pat is rising, and a rate hike at the September meeting remains a real possibility.
Iran-related volatility whipsawed markets in August, though oil prices ended the month little changed on balance. A reprieve early in the period, when the administration stepped back from a planned strike and resumed Strait of Hormuz negotiations through Oman, gave way to renewed tensions as Tehran threatened a "fully offensive" posture and demanded full implementation of the memorandum of understanding. A further escalation on the final day of the month left the diplomatic picture unsettled. Crude swung meaningfully within the month but finished roughly flat, masking the degree of uncertainty that persisted throughout.
July inflation figures extended the improved tone from June. Core CPI rose 0.2%, edging the annual rate down to 2.5%, and the headline increased just 0.1%, pulling the twelve-month pace to 3.4%. The PPI report was also encouraging, with headline prices flat and core measures coming in below expectations. The PCE data showed core prices up 0.2% in July, holding the year-over-year rate at 3.3%, though the unrounded figure was close enough to rounding up that the improvement is more fragile than the headlines suggest. Second-quarter core PCE was revised up to a 3.6% annualized pace, and corporate profits were notably strong, rising over 10% in the quarter and more than 22% year-over-year. Capital goods shipments accelerated to nearly a 20% annualized rate, pointing to continued strength in business investment.
At Jackson Hole, Chair Warsh laid out a hawkish framework for monetary policy that left little doubt about his priorities. He characterized the 2% PCE target as "firm" and "fixed," dismissed the recent improvement in monthly data as insufficient evidence of a trend, and highlighted that more than half of the PCE basket still shows inflation above 3%. He emphasized interest rates as the primary tool to achieve price stability and reiterated his skepticism of forward guidance as a policy instrument. The speech triggered an immediate bear-flattening response in the front end. On employment, July nonfarm payrolls fell by 23,000 with substantial downward revisions to prior months, but the decline was concentrated in seasonal government hiring and private payrolls rose modestly. The unemployment rate dropped to 4.1% on further labor force contraction. The preliminary benchmark revision suggested payroll growth through March 2026 was overstated by roughly 79,000 jobs.
The long end of the Treasury market was the focal point of August's most dramatic price action. The 30-year yield climbed to levels not seen since 2007, reflecting elevated issuance, fiscal concerns, and a structural repricing of term premium. The Treasury Department intervened with an unscheduled announcement to at least double the size of long-dated buybacks, characterizing the move as liquidity support though the market interpreted it as an effort to cap yields. Separately, Japan secured access to the Fed's FIMA repo facility for dollar liquidity, a development that eased fears about forced selling of Treasuries by Japanese institutions. These measures, combined with the softer inflation data, brought yields back from their highs. Net for the month, the curve flattened modestly, with the front end slightly higher and the long end roughly unchanged. Credit spreads tightened, with high yield narrowing meaningfully and energy-related names outperforming again. Investment grade spreads were flat. Agency MBS tightened slightly.
In Yorktown Bond Fund, we made modest adjustments to positioning through a month of sharp intramonth moves. High yield allocations benefited from the spread tightening, and we remain focused on shorter-duration, higher-quality names. We maintained our investment grade corporate holdings and agency mortgage exposure, while reducing a touch in high yield. Portfolio liquidity is strong and duration sits lower than the category average as rates remain volatile. Two consecutive months of improved inflation readings offer a degree of encouragement, but the structural pressures on the long end of the curve, Warsh's unambiguous hawkishness at Jackson Hole, and the unresolved Iran situation all argue for continued caution as the September FOMC meeting approaches.
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Sources: Yorktown Management & Research Co., Bloomberg.
All estimates use daily fund pricing and Yorktown's standard credit quality evaluation method.
Definition of Terms
United States Treasury (UST) - the national treasury of the federal government of the United States where it serves as an executive department. The Treasury manages all of the money coming into the government and paid out by it.
Asset-Backed Security (ABS) - An asset-backed security is an investment security --a bond or note --which is collateralized by a pool of assets, such as loans, leases, credit card debt, royalties, or receivables.
Basis Points (bps) - refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%, or 0.0001, and is used to denote the percentage change in a financial instrument.
High Yield (HY) - high-yield bonds (also called junk bonds) are bonds that pay higher interest rates because they have lower cre dit ratings than investment-grade bonds. High-yield bonds are more likely to default, so they must pay a higher yield than investbonds to compensate investors.
Investment Grade (IG) - an investment grade is a rating that signifies that a municipal or corporate bond presents a relatively low risk of default.
The funds are distributed by Ulitmus Distributors, LLC. There is no affiliation between Ultimus Fund Distributors, LLC and the other firms referenced in this material.
Gross Domestic Product (GDP) - The total value of goods produced and services provided in a country during one year.
Personal Consumption Expenditures (PCE) - the primary measure of consumer spending on goods and services in the U.S. economy.
Mortgage-backed securities (MBS): Debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property.
The fund itself has not been rated by an independent rating agency. Ratings (other than U.S. Treasury securities or securities issued or backed by U.S. agencies) provided by Nationally Recognized Statistical Rating Organizations (NRSRO's) including Standard & Poor's, Moody's, Fitch, Kroll, Morningstar DBRS, A.M. Best, and Egan-Jones. This breakdown is not an S&P credit rating or an opinion of S&P as to the creditworthiness of such portfolio. This breakdown is provided by Yorktown Management & Research. When calculating the credit quality breakdown, the manager selects the middle rating when three or more rating agencies rate a security. When two agencies rate a security, the higher of the two ratings is used, and one rating is used if that is all that is provided. A rating of BB and below would represent below investment-grade. Ratings apply to the credit worthiness of the issuers of the underlying securities and not the fund or its shares.
Ratings may be subject to change.
Investing involves risk, including loss of principal. There is no guarantee that this, or any, investment strategy will succeed. Fixed income investments are affected by a number of risks, including fluctuation in interest rates, credit risk, and prepayment risk. In general, as prevailing interest rates rise, fixed income securities prices will fall. Diversification does not ensure a profit or guarantee against loss.
1 Includes Structured Notes, Preferred, and Corporate Bonds not rated by a Nationally Recognized Statistical Rating Organizatio n (NRSRO).
2 Duration measures the sensitivity of the price (the value of principal) of a fixed -income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices. Spread duration is the sensitivity of the price of a security to changes in its credit spread. The credit spread is the difference between the yield of a security and the yield of a benchmark rate, such as a cash interest rate or government bond yield.
3 Rating Sensitive, Component, and Step-Up Bonds.
4 Weightings subject to change.