Bond Yields “Dangerously” Surge – WHY?

Last month, it took us 24 hours, door to door, to get home from a remote village in the French Alps. The other day, it took us 26 hours, door to door, to get home from Miami without weather causing issues. Avelo, the official airline of Heritage Capital and the Schatz family, totally let us down. Between a diversion to another airport, flight attendant illness, crew timeout, towing the plane and the need for more fuel, it was an epic travel nightmare, marred with lies and the worst communication in my travel history. And that is saying an awful lot from someone who flew People’s Express at one time!

I originally wrote this blog on Sunday morning. Then it somehow disappeared, likely from my fat fingers. So I recreated it best I could during my travels.

Greetings from the Sunshine State where I am about to head home from visiting clients as well as Parent’s Weekend at the U. Spending a full weekend in the Miami area taught me a few things. I made the right choice to attend the University of Rochester. There is no way I could have handled the “distractions” of Miami. Miami is insanely expensive. The parking, the dinners, the bar scene. And housing? I literally laughed out loud. But it’s so beautiful down there.

Sitting at dinner one night, there was stunning woman with a male companion next to us. They didn’t fit together, so I had to eavesdrop and find out the deal. Turns out, she was Ms. Israel and he was a business associate. Of course, I had to introduce myself which embarrassed both my wife and son. Next thing I know, my wife is exchanging social media handles with her and I was peppering the guy about the business.

I often say that our clients are among the sharpest and brightest around. They ask thoughtful questions. They respectfully push back when they don’t agree. It’s never personal which we wouldn’t accept anyway. Renee and I always comment how nice our clients are.

Lately, a few folks have asked about long-term interest rates. After all, the media is now obsessed with them, telling us that it’s end of the world. Last I checked, that only happens once. Let me show you the yield chart on the 10-Year Note over various time horizons to get a better idea and make your own informed opinion.

In 2026, (below) yields on the 10-Year have risen dramatically, 25%.

Let’s turn to the last three years. The chart below is less dramatic with the average yield around 4.35%.

Over the last 10 years, you can see a solid long-term trend that has risen.

Finally, 30 years offers the best long-term view with current yields just marginally above the average.

With all that said, please remember that long-term yields run in grand 40-year super cycles. The last cycle high peaked in 1981 which forecast the next low in 2021. So, on balance, the U.S. is in a higher interest rate cycle through the next few decades. This is not new. I have discussed it on and off for 15 years. It doesn’t mean that rates go up every year for 40 years. There will be intervening down cycles, just like we saw higher ones from 1981 through 2020.

Why are yields going up so much right now?

First, to me, it doesn’t really matter as long as you ignore what the media says. It is definitely not from inflation which is right at its long-term average. And it’s not from oil which is below the levels seen in 2022 as well as 2008. Nope. Not even close. Perhaps a touch has to do with the economy which is forecast to surge in Q3. The real reason, in my humble opinion, is that the markets have started losing confidence. And why? Because of the flood of new issuance and refinancings on the horizon. And why is that? Because our national debt is $40 trillion with no conventional fiscal method to stop the increase. And that’s because our annual budget deficits average $2 trillion since COVID.

Before folks email me that the U.S. needs to cut spending or tax the rich, please wait. The U.S. could tax every millionaire at 100% and only fund the government for 4-6 months. Cutting expenses is no better because servicing the debt is now our number one expense. There is not enough to cut. Years ago, I sharply criticized Ben Bernanke and Janet Yellen for not terming out our debt when rates were less than 1%. What a colossal mistake.

Treasury Secretary Scott Bessent is 100% correct. The U.S. needs at least 3% GDP growth annually with budget deficits no more than 3% of GDP. He also added 3 million barrels of domestic oil and gas daily which I replace with 3% long-term bond yields. Good luck turning that into fruition.

And yet, with all this, the economy is surging and the stock market is close to all-time highs.

On Friday we bought GDX and more JAAA. We sold SSO, PCY, XLRE and some MRNA. On Monday we bought SSO. We sold GDX, ITA, WEN, some MQQQ and some QLD.