The yield on ten-year Treasuries (4.99 percent as I write) reached 5 percent on Monday for the first time since a brief moment in 2023 and then, before that, 2007. At the beginning of the year, it was around 4.18 percent, and it has been trending up since March. The 30-years are yielding 5.35 percent, essentially at their year highs, up from 4.86 percent. Of late, worries about the effect of higher oil prices on inflation have been doing their bit to push up yields, but, as we explained in a recent editorial, other factors are at play too:
In 2025, interest expense amounted to 15 percent of federal spending, a number that is set to be boosted further by persistent deficits, the dark magic of compounding, and the higher interest rates that those facts all call for. Any difference that the cost of AI-related borrowing may be making to rates may be a nice excuse, but any effect is probably at the margin. One thing, however, that is as close to certain as anything can be is that the low interest rates of the previous decade are gone for the foreseeable future. Another is that the reversal of anything that was left of the peace dividend has further to go.
Let’s not even talk about the $5,000 dividend the president is still pushing — something, apparently, that “we can easily handle . . . because we’re taking in so much money.”
The government deficit for this fiscal year is likely to exceed $2 trillion.
Last week, economist Robin Brooks, who maintains that a long-term “debasement trade” is underway, dismisses arguments that rising yields can be explained by the demand for capital created by investment in AI or even good ol’ growth. Turning first to AI investment (or spending on our own annihilation if you believe Silicon Valley’s revival-tent wing) Brooks argues that there is no sign of any “crowding out” brought about by AI-driven borrowing. Click on the link to see that during the dotcom bubble there was substantial net borrowing by the private sector. That’s not happening now.
So how about growth? Brooks notes that:
markets are aggressively differentiating between high- and low-debt countries as global yields rise… The lowest cumulative rise in yields this year (relative to a global average) is in Switzerland, Norway, Sweden, New Zealand and Australia. The biggest rise is for the UK, France, Japan, Italy, Greece and the US. This ranking is obviously about debt (and political dysfunction). We’re in a global debt shock. Not a global “growth” shock.
Writing a week or so ago, Brooks stressed that over-indebtedness was not a problem confined to the U.S. It has “engulfed pretty much every advanced economy.” Indeed it has, and a critical turning point was when underlying over-spending was turbo-charged by the response to Covid-19. The good news is that Brooks does not expect an “an imminent cataclysm.”
However:
Governments — as the recent Treasury buybacks show — are doing everything they can to slow the rise in yields. This will be a slow burn that – every once in a while – heats up for a few weeks.
For all Treasury Secretary Bessent’s maneuvers, the European Central Bank wins the prize for messing around with the price of money:
it intervened aggressively in 2022 to cap Italian and Spanish yields and introduced a new tool to normalize this kind of thing going forward (TPI).
And the Bank of Japan has been busy too, buying up the government’s bonds.
All this, concludes Brooks:
boils down to artificial yield caps in some form or other. Governments everywhere are trying to slow the rise in yields, which means the “shadow yield,” i.e. where yields would be without government interference, is quite a bit higher than observed yields in most countries. This sell-off therefore has many years to go before observed yields will be allowed to catch up with their shadow yields.
Messing with prices (including those of money) almost always leads to trouble. Under the circumstances it is intriguing that markets are not really pricing in inflation.
If I had to guess, the most likely crisis in the short term is in the U.K., where the yields on British government bonds (gilts) are soaring, hitting their highest levels in decades.