Lyn Alden: Debt System ‘Is Breaking’—How High Will Yields Go?

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Lyn Alden (1:00)

You start to get basically emerging market characteristics in what is otherwise a developed economy. Above a certain point, when you have all this interest expense, someone has to buy those bonds. So you can get an environment where the central bank is expanding its balance sheet to buy bonds even when inflation is above target and doesn't really have a good answer for why it's doing it other than because they can't let the bond market break.

David Lin (1:24)

Lyn Alden is back, founder of Lyn Alden Investment Strategy. On the agenda today, of course, inflation concerns are prevalent. Diesel is at an all-time high. Bond yields, especially on the long end of the curve, are now at 20-year highs.

And today, we have a weak jobs report. This is Friday, October 2nd. Welcome back to the show, Lyn. Good to see you again.

Lyn Alden (1:48)

Thanks for having me back. Always happy to be here.

David Lin (1:50)

I just want to start with a question that I want to ask you. This is the question that's burning a hole in my pocket or my mind, so to speak. How high will bond yields go? Talking about the 10 in the 30 year.

How would you evaluate that question? And walk us through your thought process here.

Lyn Alden (2:04)

That's a good question. It's kind of a trillion dollar question. The short answer, because I'm not a trader, I'm not sure what's going to happen in a three to six month period. But there's a couple of things I would point out. One is that despite the damage we've seen on the long end, meaning the sharply rising long end yields, the yield curve itself is still fairly flat. And so it's not as though the uniquely lost control of the long end. It's more like, as the market realizes, that interest rates are going to be elevated for longer than they initially thought. The long end is just kind of pushing up to where it realistically should be in that new kind of reality. So I think the first step we can have when trying to determine how high they will go, is to examine how high they can go. Because just because they can do something doesn't mean they will, but at least sets the stage for what would be very unusual versus what would not be. And I would point out that even 6% yields on the 10-year wouldn't be a particularly steep yield curve. It would only be moderately higher than it is now. It wouldn't be unusually steep.

And that's not necessarily a prediction that we're going to get to 6%, but it's more like saying that current yields, long end, if anything, are still modest compared to the short end. And nothing would be fundamentally surprising about 6% yields.

And so, I think basically as it from a trading perspective, there's a pretty big range that makes sense. Now, from what I'm seeing on social media, what I'm seeing on financial media, bond yields are getting a ton of attention. That tends to be more of a sentiment indicator that maybe the bulk of the trade is done. So, like my current base case wouldn't necessarily call for 6%.

But I think that having that kind of conception, like that range of quantified aspects makes sense. I don't know if that's helpful, but that's kind of how I'm viewing it. That realistically, bond yields should be kind of at where they are now or a little higher. And then there's questions like, what will the Treasury Secretary do? You know, what kind of tools will be done to try to suppress those yields versus what like, you know, to what extent will they just be allowed to kind of flail around for a while and find new buyers?

David Lin (4:27)

Well, the question is to how the government can afford higher interest rates. I hear this a lot. Let's just break this down. So this is from the government website here. The Debt Dashboard National. Total national debt has grown by $82,000 per second. That's an interesting way of breaking it. I haven't seen that one before. Okay. Well, yeah, what's going by 82,000 every second? We have $82,000 of more debt. You're poor by $82,000 every second. It's now been three seconds since I made that statement. Anyway, the point I'm trying to make here is, Lyn, composition of US debt. People warn us about, well, yes, the 10-year and the 30-year going up, that's going to cost the government more. Yes.