Deep Dive: Is the Era of Cheap Money Over?

**Zaid Admani** (0:00)
Welcome back to The Rundown for another Weekend Deep Dive. Today, we are talking about the bond market. This week, the 30-year treasury yield climbed above 5.3%, its highest level since 2007 And this caught the attention of Treasury Secretary Scott Bessent, who tried to step in to push yields lower. And so far, it hasn't worked. So in today's episode, we're breaking down why yields are surging, what the Treasury Department's buyback actually does, and what permanently higher borrowing cost could mean for housing, the AI boom, and our portfolios. We got a great one for you today.
Let's dive in.
Now, before we get into why bond yields are surging, we need to talk about why any of this matters to us anyways. So let's start with what a Treasury bond actually is. It's basically an IOU from the US federal government. You know, at this point, every year the US government spends more money than it actually collects in taxes, so it has to borrow money to make up that difference. And it does that by selling bonds. Investors give the government cash, and in return, the government promises to pay interest and return the money when the bond matures. And Treasuries come in different lengths. There are short-term Treasury bills that mature within a year, and there's longer-term Treasury notes and bonds that can last 10, 20, or even 30 years. And the interest rate that investors earn on those bonds is called the yield. Now, this is the part that can get kind of confusing. Bond prices and yields move in opposite directions. When investors buy Treasury bonds, the price of those bonds go up and the yield goes down. But when investors sell Treasury bonds, the price of the bond goes down, but the yields go up. So think about it this way. Let's say you own a $100 bond that pays $4 a year in interest. So that basically means the bond yields 4%.
But then investors get nervous and they decide they're only willing to pay $80 for that same bond. Well, that bond is still paying $4 a year, but now that $4 payment represents a 5% return on the lower $80 price. So the price of the bond went down, but the yield went up. So when you hear that Treasury yields are surging, what that really means is that investors are selling government bonds or refusing to buy them unless the government offers a higher return. And that's what's going on today, but we'll get more into the details in a bit. And by the way, US Treasury yields aren't some niche number that only matter to bond traders. These yields also influence almost everything in the economy. One of the most important things to watch is the 10-year Treasury yield, because that establishes the floor for mortgage rates and auto loans and corporate borrowing. So as the yield for the Treasury goes up, so do mortgage rates and borrowing for businesses. And that makes it more expensive for companies to build a factory or buy new equipment or acquire another company or finance an enormous AI data center. And Treasury yields also affect stock valuation. Investors are constantly comparing the potential return from stocks with the return they can get from safer assets like Treasuries. When the yields for these Treasuries are low, say like 2%, investors are more willing to take a chance on a high-risk tech stock that might deliver big profits over time. But if a long-term Treasury is paying around 5%, then investors might choose to lock in the 5% rate instead of investing in a risky stock. And that's why high-growth tech stocks can get hit especially hard when long-term yields start going up. And beyond just stocks and mortgages, Treasuries are basically like the steel beams holding up the global financial system. Banks use Treasuries as collateral, companies use them to price other debt, and governments all over the world use them to store reserves. And historically, investors were happy to accept the lower return on Treasuries because they were considered the safest asset on the planet, backed by the full economic and military strength of the United States. But that deal is starting to change. Investors are now demanding a premium to lend money to the US government. So let's talk about what's driving this bond market revolt. So why are Treasury yields suddenly surging right now? Well, there's not a single explanation here. It's really three different problems hitting the bond market at the same time. Problem number one is inflation. The war with Iran has pushed oil prices higher, with Brent crude currently sitting above $90 a barrel. And oil affects the price of almost everything. It raises the cost of transportation and manufacturing and agriculture and plastics and airfare, you name it. So when oil prices start going up, bond investors immediately start worrying that inflation could remain higher for longer. And inflation is basically like kryptonite for a long-term bond, because if you lend money to the government for 30 years at a fixed rate, but inflation stays elevated, the dollars you receive in the future will buy less than you expected. So investors demand a higher yield today to compensate for that risk. Problem number two is the ballooning debt of the US government. The US federal government continues to spend more money than it brings in. In fact, the federal government is expected to run a roughly $2 trillion deficit this year. So the government has to borrow money to cover that gap between what it collects and what it spends. And the total debt for the government is just getting massive. The national debt crossed $40 trillion this week. And you know, the government needs to keep issuing new debt to refinance the old debt on bonds that are maturing. Now, this doesn't mean the US government will suddenly miss an interest payment to investors. Investors are still showing up to lend the government money, but the investors are demanding higher interest rates to do it. A part of the reason they can demand more yield right now is for the first time in a long time, bond investors have another low risk borrower competing for their money, which is big tech companies. And that brings me to the third reason why treasury yields are spiking right now. It has to do with the AI boom. So you have companies like Amazon, Alphabet, Meta, and Oracle all borrowing billions of dollars to fund the AI build out. We're talking data centers and chips and power infrastructure. In fact, corporations are on track to issue a record $1.9 trillion in investment great debt this year, and a big chunk of that is AI related. And since the companies taking on all this debt are multi-trillion dollar companies with massive cash flows from their existing businesses, investors are happy to lend them at attractive rates. I mean, at this point, who would you feel more comfortable lending money to? Google or the US government? So yeah, for the first time in decades, the US government has real competition for bond market investors. So that's the basic problem right now when it comes to the bond market. Investors are worried about inflation, they're staring down a 40 trillion dollar national debt, and they've got big tech companies competing for their cash as well. You put all that together and lenders are demanding better rates to hand over their money to the US government. Well, this week, Treasury Secretary decided that he'd seen enough and he tried to step in to push yields lower. So let's break down what the US Treasury Department is trying to do and why it probably won't work.