40 years of riskless wealth creation unravels as yields firm
The lazy 40-year trade
For 40 years, falling yields on the 10-year U.S. Treasury drove bond prices higher, turbo-charging a historic bull market in fixed income and equities, creating most of the wealth that’s sloshing around today.
But since the 2020 interest rate low, that long-term trend has flipped.
Yields are rising, and bond values are falling, a sharp reversal (and some big losses in fixed income) after decades of consistent gains.
10 year Treasury Note yield to maturity, inverted to illustrate the direction of note value/price.
Debts and deficits come home to roost
Crucially, the very recent surge in yields isn’t being driven by the Fed’s policy rate, but by mounting concerns over U.S. debt, structural deficits, and an interest bill now growing nearly three times faster than GDP.
Nothing new if you’ve been keeping up to date with my blogs.
But ironically, the only proven “cure” for this fiscal spiral may again be the Fed.
Sooner or later, it will be forced to intervene to cap yields and stabilise the system so that the U.S. Treasury and corporates sourcing debt in U.S. and Eurodollar markets, can once again ‘borrow long,’ at a viable cost of capital.
The Fed’s future monetisation of today’s debt drives today’s markets
This looming backstop also helps explain why gold continues to go up after hostilities have subsided and tariffs have momentarily paused, and why equities (which lag gold and bitcoin) are again catching a strong bid.
In short, bond markets are re-pricing sovereign debt risk while share markets are fading (ignoring) future tariffs and hostilities, and pricing in the eventual return of monetary support from the Fed, even if that fiscal promiscuity crisis management comes wrapped up in an acronym that’s not exactly QE. But it’s still QE Infinity. And there’s no change to that secular thesis, just some funky cycles in between.
Still, I wonder where anti-monetary debasement assets like #gold and #bitcoin will eventually top out with gold miners now catching up to bullion, and bitcoin hitting a new all-time-high above US$110k 🏆
See you in the market.
Mike
With decades of success across six continents, NextLevelCorporate expertly navigates the intersection of M&A, financial advisory, and business strategy—delivering macroeconomically aligned corporate development strategies, with bespoke transactions that bring them to life.
All content is copyright NextLevelCorporate. NextLevelCorporate and logo are registered trademarks.