Labor, Growth, and Inflation: How Interest Rates Drive the Credit Cycle
Capital Flows
· Capital Flows
· April 23, 2026 at 21:26
· ⏱ 7 min read
| Read on Substack ↗
Summary
The newsletter argues that the current market rally is not driven by short covering but by a structural regime shift: declining geopolitical risk (attribution fell from 40% to 9%), falling real rates (1-year real rates 45bps from negative), and Fed inaction that is net stimulative. This sets up a credit-cycle melt-up across equities, metals, and real estate, with the Z6/Z7 SOFR spread pricing a Warsh-era policy shift. Traders should prepare for continued upside, with pullbacks as buying opportunities unless core CPI reaccelerates.
•Geopolitical risk attribution in S&P 500 dropped from 40% to 9%, accounting for the majority of the rally.
•1-year real rates are 45 basis points from zero; negative real rates would trigger the next leg of the credit cycle.
•Fed inaction (neither hiking nor cutting) pushes real rates down via inflation swaps, creating a liquidity expansion without a nominal rate cut.
•The Z6/Z7 SOFR spread prices zero cuts in 2026 and 25bps of cuts in 2027; the spread reflects the market's expectation of a Warsh regime change.
•Goldman Sachs High Yield Debt Sensitivity index hit new highs, refuting the liquidity contraction narrative and confirming capital moving out the risk curve.
•NQ's 17% rally cannot be explained by short covering because mega-cap short interest is negligible; fundamental bids from software inflection and data center REITs are driving the move.